Commission File No. 1-12597
CULP, INC.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer, large accelerated filer, and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one);
Large accelerated filer ☐ | Accelerated filer ☒ | Non-accelerated filer ☐ |
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| | Smaller Reporting Company ☐ | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐YES ☒ NO ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common shares outstanding at July 31, 2016: 12,306,956January 29, 2017: 12,314,756
Par Value: $0.05 per share
INDEX TO FORM 10-Q
For the period ended July 31, 2016January 29, 2017
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Part I - Financial Statements | |
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| | I-1 |
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| | I-2 |
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| | I-3 |
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| | I-4 |
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| | I-5 |
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| | I-6 |
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| | I-25 I-28 |
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| I-26 I-29 |
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| I-47 |
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| I-47 |
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| I-43
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Part II - Other Information | |
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| II-1 |
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| II-1 |
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| II-1 |
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| II-2 |
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| II-3 |
Item 1: Financial Statements | | | | | | |
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CULP, INC. | |
CONSOLIDATED STATEMENTS OF NET INCOME | |
FOR THE THREE MONTHS ENDED JULY 31, 2016 AND AUGUST 2, 2015 | |
UNAUDITED | |
(Amounts in Thousands, Except for Per Share Data) | |
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| | THREE MONTHS ENDED | |
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| | July 31, | | | August 2, | |
| | 2016 | | | 2015 | |
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Net sales | | $ | 80,682 | | | | 80,185 | |
Cost of sales | | | 62,263 | | | | 63,983 | |
Gross profit | | | 18,419 | | | | 16,202 | |
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Selling, general and | | | | | | | | |
administrative expenses | | | 9,746 | | | | 8,741 | |
Income from operations | | | 8,673 | | | | 7,461 | |
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Interest expense | | | - | | | | 24 | |
Interest income | | | (25 | ) | | | (66 | ) |
Other expense | | | 152 | | | | 95 | |
Income before income taxes | | | 8,546 | | | | 7,408 | |
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Income taxes | | | 3,233 | | | | 2,707 | |
Net income | | $ | 5,313 | | | | 4,701 | |
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Net income per share, basic | | $ | 0.43 | | | | 0.38 | |
Net income per share, diluted | | | 0.43 | | | | 0.38 | |
Average shares outstanding, basic | | | 12,286 | | | | 12,277 | |
Average shares outstanding, diluted | | | 12,463 | | | | 12,456 | |
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CULP, INC. | | CONSOLIDATED STATEMENTS OF NET INCOME | | FOR THE THREE AND NINE MONTHS ENDED JANUARY 29, 2017 AND JANUARY 31, 2016 | | UNAUDITED | | (Amounts in Thousands, Except for Per Share Data) | | | | | | | | | | | THREE MONTHS ENDED | | | | | | | | | | | January 29, | | | January 31, | | | | 2017 | | | 2016 | | | | | | | | | Net sales | | $ | 76,169 | | | | 78,466 | | Cost of sales | | | 59,410 | | | | 61,903 | | Gross profit | | | 16,759 | | | | 16,563 | | | | | | | | | | | Selling, general and | | | | | | | | | administrative expenses | | | 9,824 | | | | 9,337 | | Income from operations | | | 6,935 | | | | 7,226 | | | | | | | | | | | Interest income | | | (124 | ) | | | (38 | ) | Other expense | | | 69 | | | | 85 | | Income before income taxes | | | 6,990 | | | | 7,179 | | | | | | | | | | | Income taxes | | | 643 | | | | 2,317 | | Net income | | $ | 6,347 | | | | 4,862 | | | | | | | | | | | Net income per share, basic | | $ | 0.52 | | | | 0.39 | | Net income per share, diluted | | | 0.51 | | | | 0.39 | | Average shares outstanding, basic | | | 12,313 | | | | 12,331 | | Average shares outstanding, diluted | | | 12,544 | | | | 12,486 | | | | | | | | | | | | | NINE MONTHS ENDED | | | | | | | | | | | | | January 29, | | | January 31, | | | | 2017 | | | 2016 | | | | | | | | | | | Net sales | | $ | 232,194 | | | | 235,607 | | Cost of sales | | | 180,115 | | | | 187,109 | | Gross profit | | | 52,079 | | | | 48,498 | | | | | | | | | | | Selling, general and | | | | | | | | | administrative expenses | | | 29,171 | | | | 27,512 | | Income from operations | | | 22,908 | | | | 20,986 | | | | | | | | | | | Interest income | | | (164 | ) | | | (150 | ) | Other expense | | | 376 | | | | 405 | | Income before income taxes | | | 22,696 | | | | 20,731 | | | | | | | | | | | Income taxes | | | 6,560 | | | | 7,398 | | Net income | | $ | 16,136 | | | | 13,333 | | | | | | | | | | | Net income per share, basic | | $ | 1.31 | | | | 1.08 | | Net income per share, diluted | | | 1.29 | | | | 1.07 | | Average shares outstanding, basic | | | 12,302 | | | | 12,317 | | Average shares outstanding, diluted | | | 12,517 | | | | 12,488 | |
See accompanying notes to the consolidated financial statements. | | | | | |
CULP, INC. | |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | |
FOR THE THREE MONTHS ENDED JULY 31, 2016 AND AUGUST 2, 2015 | |
UNAUDITED | |
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| THREE MONTHS ENDED | |
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| July 31, | | August 2, | |
| 2016 | | 2015 | |
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Net income | | $ | 5,313 | | | | 4,701 | |
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Other comprehensive income (loss) | | | | | | | | |
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Unrealized holding gains (losses) on investments | | | 84 | | | | (89 | ) |
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Reclassification adjustment for realized loss included in net income | | | 12 | | | | - | |
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Total other comprehensive income (loss) | | | 96 | | | | (89 | ) |
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Comprehensive income | | | 5,409 | | | | 4,612 | |
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See accompanying notes to the consolidated financial statements. | | | | | | | | |
CULP, INC. | |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | |
FOR THE THREE AND NINE MONTHS ENDED JANUARY 29, 2017 AND JANUARY 31, 2016 | |
(UNAUDITED) | |
(AMOUNTS IN THOUSANDS) | |
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| | THREE MONTHS ENDED | |
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| | January 29, | | | January 31, | |
| | 2017 | | | 2016 | |
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Net income | | $ | 6,347 | | | $ | 4,862 | |
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Other comprehensive loss | | | | | | | | |
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Unrealized losses on investments | | | | | | | | |
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Unrealized holding losses on investments | | | (13 | ) | | | (194 | ) |
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Reclassification adjustment for realized loss included in net income | | | - | | | | 71 | |
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Total other comprehensive loss | | | (13 | ) | | | (123 | ) |
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Comprehensive income | | $ | 6,334 | | | $ | 4,739 | |
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| | NINE MONTHS ENDED | |
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| | January 29, | | | January 31, | |
| | 2017 | | | 2016 | |
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Net income | | $ | 16,136 | | | $ | 13,333 | |
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Other comprehensive gain (loss) | | | | | | | | |
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Unrealized gains (losses) on investments | | | | | | | | |
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Unrealized holding gains (losses) on investments | | | 75 | | | | (312 | ) |
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Reclassification adjustment for realized loss included in net income | | | 12 | | | | 127 | |
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Total other comprehensive gain (loss) | | | 87 | | | | (185 | ) |
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Comprehensive income | | $ | 16,223 | | | $ | 13,148 | |
See accompanying notes to consolidated financial statements.
CULP, INC. | |
CULP, INC. | | CONSOLIDATED BALANCE SHEETS | | JANUARY 29, 2017, JANUARY 31, 2016 AND MAY 1, 2016 | | UNAUDITED | | (Amounts in Thousands) | | | | | | | | | | | | | | January 29, | | | January 31, | | | * May 1, | | | | 2017 | | | 2016 | | | 2016 | | Current assets: | | | | | | | | | | Cash and cash equivalents | | $ | 15,659 | | | | 31,713 | | | | 37,787 | | Short-term investments | | | 2,410 | | | | 4,259 | | | | 4,359 | | Accounts receivable, net | | | 22,726 | | | | 26,784 | | | | 23,481 | | Inventories | | | 46,193 | | | | 48,485 | | | | 46,531 | | Income taxes receivable | | | - | | | | 23 | | | | 155 | | Other current assets | | | 2,514 | | | | 2,331 | | | | 2,477 | | Total current assets | | | 89,502 | | | | 113,595 | | | | 114,790 | | | | | | | | | | | | | | | Property, plant and equipment, net | | | 50,333 | | | | 38,157 | | | | 39,973 | | Goodwill | | | 11,462 | | | | 11,462 | | | | 11,462 | | Deferred income taxes | | | 422 | | | | 4,312 | | | | 2,319 | | Long-term investments - Held-To-Maturity | | | 30,832 | | | | - | | | | - | | Long-term investments - Rabbi Trust | | | 5,488 | | | | 3,590 | | | | 4,025 | | Investment in unconsolidated joint venture | | | 600 | | | | - | | | | - | | Other assets | | | 2,417 | | | | 2,435 | | | | 2,573 | | | | | | | | | | | | | | | Total assets | | $ | 191,056 | | | | 173,551 | | | | 175,142 | | | | | | | | | | | | | | | Current liabilities: | | | | | | | | | | | | | Accounts payable-trade | | $ | 22,352 | | | | 25,601 | | | | 23,994 | | Accounts payable - capital expenditures | | | 4,886 | | | | 380 | | | | 224 | | Accrued expenses | | | 10,511 | | | | 12,690 | | | | 11,922 | | Income taxes payable - current | | | 217 | | | | 622 | | | | 180 | | Total current liabilities | | | 37,966 | | | | 39,293 | | | | 36,320 | | | | | | | | | | | | | | | Accounts payable - capital expenditures | | | 708 | | | | - | | | | | | Income taxes payable - long-term | | | 1,817 | | | | 3,480 | | | | 3,841 | | Deferred income taxes | | | 2,924 | | | | 1,209 | | | | 1,483 | | Deferred compensation | | | 5,327 | | | | 4,495 | | | | 4,686 | | | | | | | | | | | | | | | Total liabilities | | | 48,742 | | | | 48,477 | | | | 46,330 | | | | | | | | | | | | | | | Commitments and Contingencies (Notes 15 and 16) | | | | | | | | | | | | | | | | | | | | | | | | | | Shareholders' equity | | | | | | | | | | | | | Preferred stock, $0.05 par value, authorized 10,000,000 | | | - | | | | - | | | | - | | Common stock, $0.05 par value, authorized | | | | | | | | | | | | | 40,000,000 shares, issued and outstanding | | | | | | | | | | | | | 12,314,756 at January 29, 2017; 12,250,489 | | | | | | | | | | | | | at January 31, 2016; and 12,265,489 at | | | | | | | | | | | | | May 1, 2016 | | | 615 | | | | 613 | | | | 614 | | Capital contributed in excess of par value | | | 46,365 | | | | 42,937 | | | | 43,795 | | Accumulated earnings | | | 95,391 | | | | 81,804 | | | | 84,547 | | Accumulated other comprehensive loss | | | (57 | ) | | | (280 | ) | | | (144 | ) | Total shareholders' equity | | | 142,314 | | | | 125,074 | | | | 128,812 | | | | | | | | | | | | | | | Total liabilities and shareholders' equity | | $ | 191,056 | | | | 173,551 | | | | 175,142 | |
* Derived from audited financial statements. See accompanying notes to consolidated financial statements. CULP, INC. | | CONSOLIDATED STATEMENTS OF CASH FLOWS | | FOR THE NINE MONTHS ENDED JANUARY 29, 2017 AND JANUARY 31, 2016 | | UNAUDITED | | (Amounts in Thousands) | | | | | | | | | | | NINE MONTHS ENDED | | | | | | | | | | | January 29, | | | January 31, | | | | 2017 | | | 2016 | | | | | | | | | Cash flows from operating activities: | | | | | | | Net income | | $ | 16,136 | | | | 13,333 | | Adjustments to reconcile net income to net cash | | | | | | | | | provided by operating activities: | | | | | | | | | Depreciation | | | 5,304 | | | | 4,888 | | Amortization of assets | | | 162 | | | | 123 | | Stock-based compensation | | | 2,619 | | | | 1,964 | | Excess tax benefit related to stock-based compensation | | | (195 | ) | | | (822 | ) | Deferred income taxes | | | 3,533 | | | | 1,906 | | Realized loss on sale of short-term investments | | | 12 | | | | 127 | | Gain on sale of equipment | | | (71 | ) | | | (66 | ) | Foreign currency exchange gains | | | (18 | ) | | | (85 | ) | Changes in assets and liabilities: | | | | | | | | | Accounts receivable | | | 340 | | | | 1,091 | | Inventories | | | (137 | ) | | | (6,485 | ) | Other current assets | | | 90 | | | | (108 | ) | Other assets | | | 51 | | | | 48 | | Accounts payable - trade | | | (946 | ) | | | (1,979 | ) | Accrued expenses and deferred compensation | | | (948 | ) | | | 1,406 | | Income taxes | | | (1,695 | ) | | | 535 | | Net cash provided by operating activities | | | 24,237 | | | | 15,876 | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | Capital expenditures | | | (9,253 | ) | | | (7,686 | ) | Investment in unconsolidated joint venture | | | (600 | ) | | | - | | Proceeds from the sale of equipment | | | 80 | | | | 230 | | Payment on life insurance policy | | | (18 | ) | | | (18 | ) | Proceeds from the sale of short-term investments | | | 2,000 | | | | 5,612 | | Purchase of short-term investments | | | (8 | ) | | | (86 | ) | Purchase of long-term investments (Held-To-Maturity) | | | (31,050 | ) | | | - | | Purchase of long-term investments (Rabbi Trust) | | | (1,431 | ) | | | (1,268 | ) | Net cash used in investing activities | | | (40,280 | ) | | | (3,216 | ) | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | Proceeds from line of credit | | | 7,000 | | | | 7,000 | | Payments on line of credit | | | (7,000 | ) | | | (7,000 | ) | Payments on vendor-financed capital expenditures | | | (1,050 | ) | | | - | | Payments on long-term debt | | | - | | | | (2,200 | ) | Excess tax benefit related to stock-based compensation | | | 195 | | | | 822 | | Repurchase of common stock | | | - | | | | (2,397 | ) | Dividends paid | | | (5,292 | ) | | | (7,281 | ) | Payments on debt issuance costs | | | (2 | ) | | | (43 | ) | Proceeds from common stock issued | | | 37 | | | | 138 | | Net cash used in financing activities | | | (6,112 | ) | | | (10,961 | ) | | | | | | | | | | Effect of exchange rate changes on cash and cash equivalents | | | 27 | | | | 289 | | | | | | | | | | | (Decrease) increase in cash and cash equivalents | | | (22,128 | ) | | | 1,988 | | | | | | | | | | | Cash and cash equivalents at beginning of period | | | 37,787 | | | | 29,725 | | | | | | | | | | | Cash and cash equivalents at end of period | | $ | 15,659 | | | | 31,713 | |
See accompanying notes to consolidated financial statements. CULP, INC. | | CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY | | UNAUDITED | | (Dollars in thousands, except share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Capital | | | | | | Accumulated | | | | | | | | | | | | | Contributed | | | | | | Other | | | Total | | | | Common Stock | | | in Excess | | | Accumulated | | | Comprehensive | | | Shareholders’ | | | | Shares | | | Amount | | | of Par Value | | | Earnings | | | Loss | | | Equity | | Balance, May 3, 2015 | | | 12,219,121 | | | $ | 611 | | | | 43,159 | | | | 75,752 | | | | (95 | ) | | $ | 119,427 | | Net income | | | - | | | | - | | | | - | | | | 16,935 | | | | - | | | | 16,935 | | Stock-based compensation | | | - | | | | - | | | | 2,742 | | | | - | | | | - | | | | 2,742 | | Unrealized loss on investments | | | - | | | | - | | | | - | | | | - | | | | (49 | ) | | | (49 | ) | Excess tax benefit related to stock | | | | | | | | | | | | | | | | | | | | | | | | | based compensation | | | - | | | | - | | | | 841 | | | | - | | | | - | | | | 841 | | Common stock repurchased | | | (100,776 | ) | | | (5 | ) | | | (2,392 | ) | | | - | | | | - | | | | (2,397 | ) | Common stock issued in connection | | | | | | | | | | | | | | | | | | | | | | | | | with performance based units | | | 115,855 | | | | 6 | | | | (6 | ) | | | - | | | | - | | | | - | | Fully vested common stock award | | | 3,000 | | | | - | | | | - | | | | - | | | | - | | | | - | | Common stock issued in connection | | | | | | | | | | | | | | | | | | | . | | | | | | with exercise of stock options | | | 54,500 | | | | 3 | | | | 197 | | | | - | | | | - | | | | 200 | | Common stock surrendered for | | | | | | | | | | | | | | | | | | | | | | | | | withholding taxes payable | | | (26,211 | ) | | | (1 | ) | | | (746 | ) | | | - | | | | - | | | | (747 | ) | Dividends paid | | | - | | | | - | | | | - | | | | (8,140 | ) | | | - | | | | (8,140 | ) | Balance, May 1, 2016 * | | | 12,265,489 | | | | 614 | | | | 43,795 | | | | 84,547 | | | | (144 | ) | | | 128,812 | | Net income | | | - | | | | - | | | | - | | | | 16,136 | | | | - | | | | 16,136 | | Stock-based compensation | | | - | | | | - | | | | 2,619 | | | | - | | | | - | | | | 2,619 | | Unrealized gain on investments | | | - | | | | - | | | | - | | | | - | | | | 87 | | | | 87 | | Excess tax benefit related to stock | | | | | | | | | | | | | | | | | | | | | | | | | based compensation | | | - | | | | - | | | | 195 | | | | - | | | | - | | | | 195 | | Common stock issued in connection | | | | | | | | | | | | | | | | | | | | | | | | | with performance based units | | | 49,192 | | | | 2 | | | | (2 | ) | | | - | | | | - | | | | - | | Fully vested common stock award | | | 4,800 | | | | - | | | | - | | | | - | | | | - | | | | - | | Common stock issued in connection | | | | | | | | | | | | | | | | | | | | | | | | | with exercise of stock options | | | 5,000 | | | | - | | | | 37 | | | | - | | | | - | | | | 37 | | Common stock surrendered for | | | | | | | | | | | | | | | | | | | | | | | | | withholding taxes payable | | | (9,725 | ) | | | (1 | ) | | | (279 | ) | | | - | | | | - | | | | (280 | ) | Dividends paid | | | - | | | | - | | | | - | | | | (5,292 | ) | | | - | | | | (5,292 | ) | Balance, January 29, 2017 | | | 12,314,756 | | | $ | 615 | | | | 46,365 | | | | 95,391 | | | | (57 | ) | | $ | 142,314 | |
* Derived from audited financial statements. See accompanying notes to consolidated financial statements. Culp, Inc. NOTES TO CONSOLIDATED BALANCE SHEETSFINANCIAL STATEMENTS | |
JULY(Unaudited) 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Culp, Inc. and subsidiaries (the “company”) include all adjustments, which are, in the opinion of management, necessary for fair presentation of the results of operations and financial position. All of these adjustments are of a normal recurring nature. Results of operations for interim periods may not be indicative of future results. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements, which are included in the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July 15, 2016, for the fiscal year ended May 1, 2016.
The company’s nine months ended January 29, 2017, and January 31, 2016, AUGUST 2,represent 39 week periods, respectively.
2. Significant Accounting Policies
As of January 29, 2017, there were no changes in the nature of our significant accounting policies or the application of those policies from those reported in our annual report on Form 10-K for the year then ended May 1, 2016.
Recently Adopted Accounting Pronouncements
In November 2015, AND MAY 1,the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, an amendment to FASB ASC Topic 740, which simplifies the presentation of deferred income taxes on an entity’s classified balance sheet. Currently, entities that are required to issue a classified balance sheet present a net current and net noncurrent deferred income tax asset or liability for each tax jurisdiction. The amendments in this ASU require entities to offset all deferred income tax assets and liabilities for each tax jurisdiction and present a net deferred income tax asset or liability as a single noncurrent amount. The recognition and measurement guidance for deferred income tax assets and liabilities are not affected by this amendment. This amended guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted and the standard may be applied either retrospectively or on a prospective basis to all deferred income tax assets and liabilities. We early adopted this amendment during the third quarter of fiscal 2016 | |
UNAUDITED | |
(Amounts on a retrospective basis.
In June 2014, the Financial Accounting Standards Board (“FASB”) amended its authoritative guidance on accounting for certain share-based payment awards. The amended guidance requires that share-based compensation awards with terms of a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in Thousands) | |
| | July 31, | | | August 2, | | | * May 1, | |
| | 2016 | | | 2015 | | | 2016 | |
Current assets: | | | | | | | | | |
Cash and cash equivalents | | $ | 45,549 | | | | 25,933 | | | | 37,787 | |
Short-term investments | | | 2,434 | | | | 6,336 | | | | 4,359 | |
Accounts receivable, net | | | 22,690 | | | | 25,707 | | | | 23,481 | |
Inventories | | | 48,131 | | | | 46,544 | | | | 46,531 | |
Income taxes receivable | | | - | | | | 142 | | | | 155 | |
Other current assets | | | 2,294 | | | | 3,502 | | | | 2,477 | |
Total current assets | | | 121,098 | | | | 108,164 | | | | 114,790 | |
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Property, plant and equipment, net | | | 41,745 | | | | 37,480 | | | | 39,973 | |
Goodwill | | | 11,462 | | | | 11,462 | | | | 11,462 | |
Deferred income taxes | | | 1,942 | | | | 4,406 | | | | 2,319 | |
Long-term investments | | | 4,611 | | | | 2,893 | | | | 4,025 | |
Other assets | | | 2,502 | | | | 2,475 | | | | 2,573 | |
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Total assets | | $ | 183,360 | | | | 166,880 | | | | 175,142 | |
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Current liabilities: | | | | | | | | | | | | |
Current maturities of long-term debt | | $ | - | | | | 2,200 | | | | - | |
Accounts payable-trade | | | 26,708 | | | | 28,233 | | | | 23,994 | |
Accounts payable - capital expenditures | | | 627 | | | | 613 | | | | 224 | |
Accrued expenses | | | 6,890 | | | | 7,731 | | | | 11,922 | |
Income taxes payable - current | | | 358 | | | | 392 | | | | 180 | |
Total current liabilities | | | 34,583 | | | | 39,169 | | | | 36,320 | |
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Income taxes payable - long-term | | | 3,779 | | | | 3,634 | | | | 3,841 | |
Deferred income taxes | | | 1,532 | | | | 1,072 | | | | 1,483 | |
Line of credit | | | 7,000 | | | | - | | | | - | |
Deferred compensation | | | 5,031 | | | | 4,280 | | | | 4,686 | |
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Total liabilities | | | 51,925 | | | | 48,155 | | | | 46,330 | |
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Commitments and Contingencies (Note 15) | | | | | | | | | | | | |
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Shareholders' equity | | | | | | | | | | | | |
Preferred stock, $0.05 par value, authorized | | | | | | | | | | | | |
10,000,000 | | | - | | | | - | | | | - | |
Common stock, $0.05 par value, authorized | | | | | | | | | | | | |
40,000,000 shares, issued and outstanding | | | | | | | | | | | | |
12,306,956 at July 31, 2016; 12,338,765 | | | | | | | | | | | | |
at August 2, 2015; and 12,265,489 at | | | | | | | | | | | | |
May 1, 2016 | | | 615 | | | | 617 | | | | 614 | |
Capital contributed in excess of par value | | | 44,453 | | | | 43,515 | | | | 43,795 | |
Accumulated earnings | | | 86,415 | | | | 74,777 | | | | 84,547 | |
Accumulated other comprehensive loss | | | (48 | ) | | | (184 | ) | | | (144 | ) |
Total shareholders' equity | | | 131,435 | | | | 118,725 | | | | 128,812 | |
| | | | | | | | | | | | |
Total liabilities and shareholders' equity | | $ | 183,360 | | | | 166,880 | | | | 175,142 | |
| | | | | | | | | | | | |
* Derived from audited financial statements. | | | | | | | | | | | | |
| | | | | | | | | | | | |
See accompanying notes to consolidated financial statements. | | | | | | | | | | | | |
CULP, INC. | |
CONSOLIDATED STATEMENTS OF CASH FLOWS | |
FOR THE THREE MONTHS ENDED JULY 31, 2016 AND AUGUST 2, 2015 | |
UNAUDITED | |
(Amounts in Thousands) | |
| | | | | | |
| | THREE MONTHS ENDED | |
| | | | | | |
| | July 31, | | | August 2, | |
| | 2016 | | | 2015 | |
| | | | | | |
Cash flows from operating activities: | | | | | | |
Net income | | $ | 5,313 | | | | 4,701 | |
Adjustments to reconcile net income to net cash | | | | | | | | |
provided by operating activities: | | | | | | | | |
Depreciation | | | 1,761 | | | | 1,555 | |
Amortization of other assets | | | 52 | | | | 47 | |
Stock-based compensation | | | 761 | | | | 265 | |
Excess tax benefit related to stock-based compensation | | | (167 | ) | | | (788 | ) |
Deferred income taxes | | | 593 | | | | 1,641 | |
Realized loss on sale of short-term investments | | | 12 | | | | - | |
Loss (gain) on sale of equipment | | | 9 | | | | (46 | ) |
Foreign currency exchange gains | | | (62 | ) | | | (57 | ) |
Changes in assets and liabilities: | | | | | | | | |
Accounts receivable | | | 611 | | | | 2,774 | |
Inventories | | | (1,808 | ) | | | (4,068 | ) |
Other current assets | | | 158 | | | | (1,149 | ) |
Other assets | | | 19 | | | | 23 | |
Accounts payable - trade | | | 3,036 | | | | (132 | ) |
Accrued expenses and deferred compensation | | | (4,911 | ) | | | (3,870 | ) |
Income taxes | | | 375 | | | | 159 | |
Net cash provided by operating activities | | | 5,752 | | | | 1,055 | |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | | |
Capital expenditures | | | (3,139 | ) | | | (3,336 | ) |
Proceeds from the sale of equipment | | | - | | | | 104 | |
Proceeds from the sale of short-term investments | | | 2,000 | | | | 3,612 | |
Purchase of short-term investments | | | (21 | ) | | | (33 | ) |
Purchase of long-term investments | | | (559 | ) | | | (478 | ) |
Net cash used in investing activities | | | (1,719 | ) | | | (131 | ) |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | | |
Proceeds from line of credit | | | 7,000 | | | | - | |
Excess tax benefit related to stock-based compensation | | | 167 | | | | 788 | |
Dividends paid | | | (3,445 | ) | | | (5,676 | ) |
Proceeds from common stock issued | | | 11 | | | | 56 | |
Net cash provided by (used in) financing activities | | | 3,733 | | | | (4,832 | ) |
| | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | | (4 | ) | | | 116 | |
| | | | | | | | |
Increase (decrease) in cash and cash equivalents | | | 7,762 | | | | (3,792 | ) |
| | | | | | | | |
Cash and cash equivalents at beginning of period | | | 37,787 | | | | 29,725 | |
| | | | | | | | |
Cash and cash equivalents at end of period | | $ | 45,549 | | | | 25,933 | |
| | | | | | | | |
See accompanying notes to consolidated financial statements. | | | | | | | | |
I -4estimating the grant-date fair value of the award and compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved. The guidance will permit an entity to apply the amendments in the update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the consolidated financial statements and to all new or modified awards thereafter. This guidance was effective for the first quarter of fiscal 2017 and did not have any impact on our consolidated financial statements as we currently do not have any share-based payment awards with terms of a performance target that affects vesting and could be achieved after the requisite service period.
CULP, INC. | |
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY | |
UNAUDITED | |
(Dollars in thousands, except share data) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | Capital | | | | | | Accumulated | | | | |
| | | | | | | | Contributed | | | | | | Other | | | Total | |
| | Common Stock | | | in Excess | | | Accumulated | | | Comprehensive | | | Shareholders’ | |
| | Shares | | | Amount | | | of Par Value | | | Earnings | | | Loss | | | Equity | |
Balance, May 3, 2015 | | | 12,219,121 | | | $ | 611 | | | | 43,159 | | | | 75,752 | | | | (95 | ) | | $ | 119,427 | |
Net income | | | - | | | | - | | | | - | | | | 16,935 | | | | - | | | | 16,935 | |
Stock-based compensation | | | - | | | | - | | | | 2,742 | | | | - | | | | - | | | | 2,742 | |
Unrealized loss on investments | | | - | | | | - | | | | - | | | | - | | | | (49 | ) | | | (49 | ) |
Excess tax benefit related to stock | | | | | | | | | | | | | | | | | | | | | | | | |
based compensation | | | - | | | | - | | | | 841 | | | | - | | | | - | | | | 841 | |
Common stock repurchased | | | (100,776 | ) | | | (5 | ) | | | (2,392 | ) | | | - | | | | - | | | | (2,397 | ) |
Common stock issued in connection | | | | | | | | | | | | | | | | | | | | | | | | |
with performance based units | | | 115,855 | | | | 6 | | | | (6 | ) | | | - | | | | - | | | | - | |
Fully vested common stock award | | | 3,000 | | | | - | | | | - | | | | - | | | | - | | | | - | |
Common stock issued in connection | | | | | | | | | | | | | | | | | | | . | | | | | |
with exercise of stock options | | | 54,500 | | | | 3 | | | | 197 | | | | - | | | | - | | | | 200 | |
Common stock surrendered for | | | | | | | | | | | | | | | | | | | | | | | | |
withholding taxes payable | | | (26,211 | ) | | | (1 | ) | | | (746 | ) | | | - | | | | - | | | | (747 | ) |
Dividends paid | | | - | | | | - | | | | - | | | | (8,140 | ) | | | - | | | | (8,140 | ) |
Balance, May 1, 2016 * | | | 12,265,489 | | | | 614 | | | | 43,795 | | | | 84,547 | | | | (144 | ) | | | 128,812 | |
Net income | | | - | | | | - | | | | - | | | | 5,313 | | | | - | | | | 5,313 | |
Stock-based compensation | | | - | | | | - | | | | 761 | | | | - | | | | - | | | | 761 | |
Unrealized gain on investments | | | - | | | | - | | | | - | | | | - | | | | 96 | | | | 96 | |
Excess tax benefit related to stock | | | | | | | | | | | | | | | | | | | | | | | | |
based compensation | | | - | | | | - | | | | 167 | | | | - | | | | - | | | | 167 | |
Common stock issued in connection | | | | | | | | | | | | | | | | | | | | | | | | |
with performance based units | | | 49,192 | | | | 2 | | | | (2 | ) | | | - | | | | - | | | | - | |
Common stock issued in connection | | | | | | | | | | | | | | | | | | | | | | | | |
with exercise of stock options | | | 2,000 | | | | - | | | | 11 | | | | - | | | | - | | | | 11 | |
Common stock surrendered for | | | | | | | | | | | | | | | | | | | | | | | | |
withholding taxes payable | | | (9,725 | ) | | | (1 | ) | | | (279 | ) | | | - | | | | - | | | | (280 | ) |
Dividends paid | | | - | | | | - | | | | - | | | | (3,445 | ) | | | - | | | | (3,445 | ) |
Balance, July 31, 2016 | | | 12,306,956 | | | $ | 615 | | | | 44,453 | | | | 86,415 | | | | (48 | ) | | $ | 131,435 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
* Derived from audited financial statements. | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements. | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Culp, Inc. and subsidiaries (the “company”) include all adjustments, which are, in the opinion of management, necessary for fair presentation of the results of operations and financial position. All of these adjustments are of a normal recurring nature. Results of operations for interim periods may not be indicative of future results. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements, which are included in the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July 15, 2016 for the fiscal year ended May 1, 2016.
The company’s three months ended July 31, 2016 and August 2, 2015, represent 13 week periods, respectively.
2. Significant Accounting Policies
As of July 31, 2016, there were no changes in the nature of our significant accounting policies or the application of those policies from those reported in our annual report on Form 10-K for the year then ended May 1, 2016.
Recently Adopted Accounting Pronouncements
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, an amendment to FASB ASC Topic 740, which simplifies the presentation of deferred income taxes on an entity’s classified balance sheet. Currently, entities that are required to issue a classified balance sheet present a net current and net noncurrent deferred income tax asset or liability for each tax jurisdiction. The amendments in this ASU require entities to offset all deferred income tax assets and liabilities for each tax jurisdiction and present a net deferred income tax asset or liability as a single noncurrent amount. The recognition and measurement guidance for deferred income tax assets and liabilities are not affected by this amendment. This amended guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted and the standard may be applied either retrospectively or on a prospective basis to all deferred income tax assets and liabilities.
We early adopted this amendment during the third quarter of fiscal 2016 on a retrospective basis. Accordingly, we reclassified our current deferred income taxes to noncurrent on our August 2, 2015 Consolidated Balance Sheet, which increased noncurrent deferred income taxes $4.0 million and decreased noncurrent deferred tax liabilities $3.0 million.
In June 2014, the Financial Accounting Standards Board (“FASB”) amended its authoritative guidance on accounting for certain share-based payment awards. The amended guidance requires that share-based compensation awards with terms of a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award and compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved. The guidance will permit an entity to apply the amendments in the update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the consolidated financial statements and to all new or modified awards thereafter.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
This guidance was effective for the first quarter of fiscal 2017 and did not have any impact on our consolidated financial statements as we currently do not have any share-based payment awards with terms of a performance target that affects vesting and could be achieved after the requisite service period.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, which amends ASC Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are intended to enhance the comparability of revenue recognition practices and will be applied to all contracts with customers. Improved disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized are requirements under the amended guidance. In April 2015, the FASB issued ASU 2015-24, Revenue from Contracts with Customers: Deferral of the Effective Date which proposed a deferral of the effective date by one year, and on July 7, 2015, the FASB decided to delay the effective date by one year. The deferral results in the new revenue standard being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We are therefore required to apply the new revenue guidance in our fiscal 2019 interim and annual financial statements. This ASU can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently assessing the impact that this guidance will have on our consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which changed the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. This ASU is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2016. We are therefore required to apply this guidance in our fiscal 2018 interim and annual financial statements. We are currently assessing the impact that this guidance will have on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which increases transparency and comparability among companies accounting for lease transactions. The most significant change of this update will require the recognition of lease assets and liabilities on the balance sheet for operating lease arrangements with lease terms greater than twelve months for lessees. This update will require a modified retrospective application which includes a number of optional practical expedients related to the identification and classification of leases commenced before the effective date. This ASU is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018. We are therefore required to apply this guidance in our fiscal 2020 interim and annual financial statements. We are currently assessing the impact that this guidance will have on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Shares-Based Payment Accounting." ASU 2016-09 is intended to improve the accounting for share-based payment transactions as part of the FASB’s simplification initiative. ASU 2016-09 changes several aspects of the accounting for share-based payment award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those years for public companies. We are therefore required to apply this guidance in our fiscal 2018 interim and annual financial statements. We are currently assessing the impact that ASU 2016-09 will have on its consolidated financial statements.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
There are no other new accounting pronouncements that are expected to have a significant impact on our consolidated financial statements.
3. Stock-Based Compensation
Equity Incentive Plan Description
On September 16, 2015, our shareholders approved an equity incentive plan entitled the Culp, Inc. 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan updated and replaced our 2007 Equity Incentive Plan (the “2007 Plan”) as the vehicle for granting new equity based awards substantially similar to those authorized under the 2007 Plan. In general, the 2015 Plan authorizes the grant of stock options intended to qualify as incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, and other equity and cash related awards as determined by our Compensation Committee. An aggregate of 1,200,000 shares of common stock were authorized for issuance under the 2015 Plan, with certain sub-limits that would apply with respect to specific types of awards that may be issued as defined in the 2015 Plan. In connection with the approval of the 2015 Plan, no further awards will be granted under the 2007 Plan, but outstanding awards under the 2007 Plan will be settled in accordance with their terms.
At July 31, 2016, there were 1,012,635 shares available for future equity based grants under our 2015 plan.
Incentive Stock Option Awards
We did not grant any incentive stock option awards during the first quarter of fiscal 2017.
At July 31, 2016, options to purchase 81,600 shares of common stock were outstanding and exercisable, had a weighted average exercise price of $8.44 per share, and a weighted average contractual term of 1.1 years. At July 31, 2016, the aggregate intrinsic value for options outstanding and exercisable was $1.6 million.
The aggregate intrinsic value for options exercised for the three months ending July 31, 2016 and August 2, 2015, was $43,000 and $814,000, respectively.
At July 31, 2016, there were no unvested incentive stock option awards. Therefore, there was no unrecognized compensation cost related to incentive stock option awards at July 31, 2016.
No compensation expense was recorded on incentive stock options for the three months ended July 31, 2016 and August 2, 2015, respectively.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Performance Based Restricted Stock Units
Fiscal 2017 Grant
On July 14, 2016, certain key members of management were granted performance based restricted stock units which could earn up to 107,880 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. These awards were valued based on the fair market value on the date of grant. The fair value of these awards was $28 per share, which represents the closing price of our common stock on the date of grant. The vesting of these awards is over the requisite service period of three years.
On July 14, 2016, a non-employee was granted performance based restricted stock units which could earn up to 11,549 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreement. The fair value of this award is measured at the earlier date of when the performance criteria are met or the end of the reporting period. At July 31, 2016, this grant was unvested and was measured at $28.53 per share, which represents the closing price of our common stock at the end of the reporting period. The vesting of this award is over the requisite service period of three years.
Fiscal 2016 Grant
On July 15, 2015, certain key members of management were granted performance based restricted stock units which could earn up to 107,554 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. These awards were valued based on the fair market value on the date of grant. The fair value of these awards was $32.23 per share, which represents the closing price of our common stock on the date of grant. The vesting of these awards is over the requisite service period of three years.
On July 15, 2015, a non-employee was granted performance based restricted stock units which could earn up to 10,364 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreement. The fair value of this award is measured at the earlier date of when the performance criteria are met or the end of the reporting period. At July 31, 2016, this grant was unvested and was measured at $28.53 per share, which represents the closing price of our common stock at the end of the reporting period. The vesting of this award is over the requisite service period of three years.
Fiscal 2015 Grants
On June 24, 2014, certain key members of management were granted performance based restricted stock units which could earn up to 102,845 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. These awards were valued based on the fair market value on the date of grant. The fair value of these awards was $17.70 per share, which represents the closing price of our common stock on the date of grant. The vesting of these awards is over the requisite service period of three years.
On March 3, 2015, a non-employee was granted performance based restricted stock units which could earn up to 28,000 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. The fair value of this award is measured at the earlier date of when the performance criteria are met or the end of the reporting period. At July 31, 2016, 16,000 restricted stock units associated with this grant were unvested and were measured at $28.53 per share, which represents the closing price of the company’s common stock at the end of the reporting period. The vesting of these 16,000 restricted stock units vest over their requisite service period of 28 months.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During the first quarter of fiscal 2017, 12,000 shares of common stock associated with the grant vested and had a weighted average fair value of $345,000 or $28.77 per share.
2014 Grant
On June 25, 2013, certain key members of management were granted performance based restricted stock units which could earn up to 72,380 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. These awards were valued based on the fair market value on the date of grant. The fair value of these awards was $17.12 per share, which represents the closing price of our common stock on the date of grant. The vesting of these awards is over the requisite service period of three years.
During the first quarter of fiscal 2017, 37,192 shares of common stock associated with this grant vested and had a weighted average fair value of $637,000 or $17.12 per share. Our fiscal 2014 grant is fully vested.
Fiscal 2013 Grant
On July 11, 2012, certain key members of management were granted performance based restricted stock units which could earn up to 120,000 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. These awards were valued based on the fair market value on the date of grant. The fair value of these awards was $10.21 per share, which represents the closing price of our common stock on the date of grant. The vesting of these awards is over the requisite service period of three years.
During the first quarter of fiscal 2016, 115,855 shares of common stock associated with our fiscal 2013 grant vested and had a weighted average fair value of $1.2 million or $10.21 per share. Our fiscal 2013 grant is fully vested.
Overall
We recorded compensation expense of $761,000 and $265,000 within selling, general, and administrative expense for performance based restricted stock units for the three month periods ending July 31, 2016 and August 2, 2015, respectively. Compensation cost is recorded based on an assessment each reporting period of the probability if certain performance goals will be met during the vesting period. If performance goals are not probable of occurrence, no compensation cost will be recognized and any recognized compensation cost would be reversed.
As of July 31, 2016, the remaining unrecognized compensation cost related to the performance based restricted stock units was $5.0 million, which is expected to be recognized over a weighted average vesting period of 2.1 years.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Accounts Receivable
A summary of accounts receivable follows:
| | | | | | | | | |
(dollars in thousands) | | July 31, 2016 | | | August 2, 2015 | | | May 1, 2016 | |
Customers | | $ | 24,669 | | | $ | 27,428 | | | $ | 25,531 | |
Allowance for doubtful accounts | | | (850 | ) | | | (935 | ) | | | (1,088 | ) |
Reserve for returns and allowances and discounts | | | (1,129 | ) | | | (786 | ) | | | (962 | ) |
| | $ | 22,690 | | | $ | 25,707 | | | $ | 23,481 | |
A summary of the activity in the allowance for doubtful accounts follows:
| | | |
| | Three months ended | |
(dollars in thousands) | | July 31, 2016 | | | August 2, 2015 | |
Beginning balance | | $ | (1,088 | ) | | $ | (851 | ) |
Provision for bad debts | | | 227 | | | | (96 | ) |
Net write-offs, net of recoveries | | | 11 | | | | 12 | |
Ending balance | | $ | (850 | ) | | $ | (935 | ) |
A summary of the activity in the allowance for returns and allowances and discounts accounts follows:
| | | |
| | Three months ended | |
(dollars in thousands) | | July 31, 2016 | | | August 2, 2015 | |
Beginning balance | | $ | (962 | ) | | $ | (738 | ) |
Provision for returns, allowances | | | | | | | | |
and discounts | | | (919 | ) | | | (709 | ) |
Credits issued | | | 752 | | | | 661 | |
Ending balance | | $ | (1,129 | ) | | $ | (786 | ) |
5. Inventories
Inventories are carried at the lower of cost or market. Cost is determined using the FIFO (first-in, first-out) method.
| | | | | | | | | |
(dollars in thousands) | | July 31, 2016 | | | August 2, 2015 | | | May 1, 2016 | |
Raw materials | | $ | 6,779 | | | $ | 6,944 | | | $ | 5,462 | |
Work-in-process | | | 3,224 | | | | 3,018 | | | | 2,972 | |
Finished goods | | | 38,128 | | | | 36,582 | | | | 38,097 | |
| | $ | 48,131 | | | $ | 46,544 | | | $ | 46,531 | |
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Other Assets
A summary of other assets follows:
| | | | | | | | | |
(dollars in thousands) | | July 31, 2016 | | | August 2, 2015 | | | May 1, 2016 | |
Cash surrender value – life insurance | | $ | 358 | | | $ | 339 | | | $ | 357 | |
Non-compete agreement, net | | | 885 | | | | 960 | | | | 903 | |
Customer relationships, net | | | 702 | | | | 753 | | | | 715 | |
Other | | | 557 | | | | 423 | | | | 598 | |
| | $ | 2,502 | | | $ | 2,475 | | | $ | 2,573 | |
Non-Compete Agreement
We recorded our non-compete agreement at its fair value based on a discounted cash flow valuation model. Our non-compete agreement is amortized on a straight-line basis over the fifteen year life of the respective agreement.
The gross carrying amount of our non-compete agreement was $2.0 million at July 31, 2016, August 2, 2015 and May 1, 2016, respectively. At July 31, 2016 and May 1, 2016, accumulated amortization for our non-compete agreement was $1.1 million. At August 2, 2015 accumulated amortization for our non-compete agreement was $1.0 million.
Amortization expense for our non-compete agreement was $19,000 for the three month periods ended July 31, 2016 and August 2, 2015. The remaining amortization expense for the next five fiscal years and thereafter follows: FY 2017 - $56,000; FY 2018 - $75,000; FY 2019- $75,000; FY 2020 - $75,000; FY 2021 - $75,000 and Thereafter - $529,000.
The weighted average amortization period for our non-compete agreement is 11.8 years as of July 31, 2016.
Customer Relationships
We recorded our customer relationships at their fair value based on a multi-period excess earnings valuation model. Our customer relationships are amortized on a straight-line basis over its seventeen year useful life.
The gross carrying amount of our customer relationships was $868,000 at July 31, 2016, August 2, 2015, and May 1, 2016, respectively. Accumulated amortization for our customer relationships was $166,000, $115,000, and $153,000 at July 31, 2016, August 2, 2015, and May 1, 2016, respectively.
Amortization expense for our customer relationships was $13,000 for the three months ending July 31, 2016 and August 2, 2015. The remaining amortization expense for the next five fiscal years and thereafter follows: FY 2017 - $38,000; FY 2018 - $51,000; FY 2019 - $51,000; FY 2020 - $51,000; FY 2021 - $51,000; and Thereafter - $460,000.
The weighted average amortization period for our customer relationships is 13.8 years as of July 31, 2016.
Cash Surrender Value – Life Insurance
At July 31, 2016, August 2, 2015, and May 1, 2016 we had one life insurance contract with a death benefit of $1.4 million.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Our cash surrender value – life insurance balances totaling $358,000, $339,000 and $357,000 at July 31, 2016, August 2, 2015, and May 1, 2016, respectively, are collectible upon death of the respective insured.
7. Accrued Expenses
A summary of accrued expenses follows:
| | | | | | | | | |
(dollars in thousands) | | July 31, 2016 | | | May 1, 2016 | | | August 2, 2015 | |
Compensation, commissions and related benefits | | $ | 5,400 | | | $ | 4,946 | | | $ | 10,011 | |
Advertising rebates | | | 485 | | | | 1,835 | | | | 870 | |
Interest | | | 7 | | | | 81 | | | | - | |
Other accrued expenses | | | 998 | | | | 869 | | | | 1,041 | |
| | $ | 6,890 | | | $ | 7,731 | | | $ | 11,922 | |
8. Long-Term Debt and Lines of Credit
A summary of long-term debt follows:
| | | | | | | | | |
(dollars in thousands) | | July 31, 2016 | | | May 1, 2016 | | | August 2, 2015 | |
Unsecured senior term notes | | $ | - | | | $ | 2,200 | | | $ | - | |
Current maturities of long-term debt | | | - | | | | (2,200 | ) | | | - | |
Long-term debt, less current maturities | | | | | | | | | | | | |
of long-term debt | | $ | - | | | $ | - | | | $ | - | |
Unsecured Senior Term Notes
We entered into a note agreement dated August 11, 2008 that provided for the issuance of $11.0 million of unsecured senior term notes with a fixed interest rate of 8.01% and a term of seven years. Principal payments of $2.2 million per year were due on the notes beginning August 11, 2011. On August 11, 2015, we paid our last annual payment of $2.2 million and this agreement has been paid in full.
Revolving Credit Agreement – United States
Our Credit Agreement with Wells Fargo Bank, N.A. (“Wells Fargo”) provides a revolving loan commitment of $30 million. Interest was charged at a rate (applicable interest rate of 1.94% at July 31, 2016) as a variable spread over LIBOR based on our ratio of debt to EBITDA. The Credit Agreement contains certain financial and other covenants as defined in the agreement and is set to expire on August 15, 2018.
The purpose of our revolving credit line is to support potential short term cash needs in different jurisdictions within our global operations, mitigate our risk associated with foreign currency exchange rate fluctuations, and repatriate earnings and profits from our foreign subsidiaries to the U.S. for various strategic purposes.
At July 31, 2016, we had outstanding borrowings associated with the Credit Agreement totaling $7.0 million. These outstanding borrowings are secured by a pledge of 65% of the common stock of Culp International Holdings Ltd. (our subsidiary located in the Cayman Islands), as required by the Credit Agreement. There were no borrowings outstanding under the Credit Agreement at August 2, 2015, and May 1, 2016, respectively.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At July 31, 2016, August 2, 2015, and May 1, 2016, there were $250,000 in outstanding letters of credit (all of which related to workers compensation) provided by the Credit Agreement.
Effective August 1, 2016, we entered into a Third Amendment to our Credit Agreement that will allow us to issue letters of credit not to exceed $7.5 million. On August 3, 2016, we issued a $5.0 million letter of credit (all of which is currently outstanding and in addition to the $250,000 letter of credit noted above) for the construction of a new building associated with our mattress fabrics segment (see Note 15 for further details). This $5.0 million letter of credit will be automatically reduced in $1.25 million increments on August 1, 2017, November 1, 2017, February 1, 2018, and May 15, 2018, respectively.
Revolving Credit Agreement – China
We have an unsecured credit agreement associated with our operations in China that provides for a line of credit of up to 40 million RMB (approximately $6.0 million USD at July 31, 2016), that expires on March 8, 2017. This agreement has an interest rate determined by the Chinese government and there were no borrowings outstanding as of July 31, 2016, August 2, 2015, and May 1, 2016.
Overall
Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. At July 31, 2016, the company was in compliance with these financial covenants.
The fair value of the company’s long-term debt is estimated by discounting the future cash flows at rates currently offered to the company for similar debt instruments of comparable maturities. At August 2, 2015, the carrying value of the company’s long-term debt was $2.2 million and the fair value was $2.3 million.
9. Fair Value of Financial Instruments
ASC Topic 820 establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and the company’s assumptions (unobservable inputs). Determining where an asset or liability falls within that hierarchy depends on the lowest level input that is significant to the fair value measurement as a whole. An adjustment to the pricing method used within either level 1 or level 2 inputs could generate a fair value measurement that effectively falls in a lower level in the hierarchy. The hierarchy consists of three broad levels as follows:
Level 1 – Quoted market prices in active markets for identical assets or liabilities;
Level 2 – Inputs other than level 1 inputs that are either directly or indirectly observable, and
Level 3 – Unobservable inputs developed using the company’s estimates and assumptions, which reflect those that market participants would use.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Recurring Basis
The following table presents information about assets measured at fair value on a recurring basis:
| Fair value measurements at July 31, 2016 using: | |
| | |
| Quoted prices in active markets for identical assets | | Significant other observable inputs | | Significant unobservable inputs | | | |
(amounts in thousands) | Level 1 | | Level 2 | | Level 3 | | Total | |
| | | | | | | | |
Assets: | | | | | | | | |
Premier Money Market Fund | | $ | 3,950 | | | | N/A | | | | N/A | | | $ | 3,950 | |
Low Duration Bond Fund | | | 1,073 | | | | N/A | | | | N/A | | | | 1,073 | |
Intermediate Term Bond Fund | | | 754 | | | | N/A | | | | N/A | | | | 754 | |
Strategic Income Fund | | | 597 | | | | N/A | | | | N/A | | | | 597 | |
Large Blend Fund | | | 310 | | | | N/A | | | | N/A | | | | 310 | |
Mid Cap Value Fund | | | 117 | | | | N/A | | | | N/A | | | | 117 | |
Growth Allocation Fund | | | 97 | | | | N/A | | | | N/A | | | | 97 | |
Other | | | 147 | | | | N/A | | | | N/A | | | | 147 | |
| Fair value measurements at August 2, 2015 using: | |
| | |
| Quoted prices in active markets for identical assets | | Significant other observable inputs | | Significant unobservable inputs | | | |
| | | | | | | | |
(amounts in thousands) | Level 1 | | Level 2 | | Level 3 | | Total | |
| | | | | | | | |
Assets: | | | | | | | | |
Premier Money Market Fund | | $ | 2,705 | | | | N/A | | | | N/A | | | $ | 2,705 | |
Intermediate Term Bond Fund | | | 2,149 | | | | N/A | | | | N/A | | | | 2,149 | |
Low Duration Bond Fund | | | 2,100 | | | | N/A | | | | N/A | | | | 2,100 | |
Limited Term Bond Fund | | | 1,092 | | | | N/A | | | | N/A | | | | 1,092 | |
Strategic Income Fund | | | 995 | | | | N/A | | | | N/A | | | | 995 | |
Growth Allocation Fund | | | 109 | | | | N/A | | | | N/A | | | | 109 | |
Other | | | 79 | | | | N/A | | | | N/A | | | | 79 | |
| Fair value measurements at May 1, 2016 using: | |
| | |
| | |
| Quoted prices in active markets for identical assets | | Significant other observable inputs | | Significant unobservable inputs | | | |
| | | | | | | | |
(amounts in thousands) | Level 1 | | Level 2 | | Level 3 | | Total | |
| | | | | | | | |
Assets: | | | | | | | | |
Premier Money Market Fund | | $ | 3,404 | | | | N/A | | | | N/A | | | $ | 3,404 | |
Low Duration Bond Fund | | | 1,604 | | | | N/A | | | | N/A | | | | 1,604 | |
Intermediate Term Bond Fund | | | 1,154 | | | | N/A | | | | N/A | | | | 1,154 | |
Strategic Income Fund | | | 999 | | | | N/A | | | | N/A | | | | 999 | |
Limited Term Bond Fund | | | 602 | | | | N/A | | | | N/A | | | | 602 | |
Large Blend Fund | | | 289 | | | | N/A | | | | N/A | | | | 289 | |
Growth Allocation Fund | | | 148 | | | | N/A | | | | N/A | | | | 148 | |
Mid Cap Value Fund | | | 102 | | | | N/A | | | | N/A | | | | 102 | |
Other | | | 82 | | | | N/A | | | | N/A | | | | 82 | |
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The determination of where an asset or liability falls in the hierarchy requires significant judgment. We evaluate our hierarchy disclosures each quarter based on various factors and it is possible that an asset or liability may be classified differently from quarter to quarter. However, we expect that changes in classifications between different levels will be rare.
Short-Term Investments
At July 31, 2016, August 2, 2015, and May 1, 2016, our short-term investments totaled $2.4 million, $6.3 million, and $4.4 million, respectively, and consisted of short-term bond funds. Our short-term bond funds are recorded at their fair value, are classified as available-for-sale, and their unrealized gains or losses are included in other comprehensive income (loss). Our short-term bond investments had an accumulated unrealized loss totaling $33,000, $184,000, and $100,000 at July 31, 2016, August 2, 2015, and May 1, 2016, respectively. At July 31, 2016, August 2, 2015, and May 1, 2016, the fair value of our short-term bond funds approximated its cost basis.
Long-Term Investments
Effective January 1, 2014, we established a Rabbi Trust to set aside funds for participants of our deferred compensation plan (the “Plan”) and enable the participants to credit their contributions to various investment options of the Plan. The investments associated with the Rabbi Trust consist of a money market fund and various mutual funds that are classified as available for sale.
Our long-term investments are recorded at their fair value of $4.6 million, $2.9 million, and $4.0 million at July 31, 2016, August 2, 2015, and May 1, 2016, respectively. Our long-term investments had an accumulated unrealized loss of $15,000 and $44,000 at July 31, 2016 and May 1, 2016, respectively. At August 2, 2015, our accumulated gains or losses regarding our long-term investments were immaterial. The fair value of our long-term investments approximates its cost basis.
Other
The carrying amount of cash and cash equivalents, accounts receivable, other current assets, line of credit, accounts payable, and accrued expenses approximates fair value because of the short maturity of these financial instruments.
10. Cash Flow Information
Interest and income taxes paid are as follows:
| | | | |
| | | Three months ended | |
(dollars in thousands) | | | July 31, 2016 | | | | August 2, 2015 | |
Interest | | $ | 3 | | | $ | - | |
Income taxes | | | 2,263 | | | | 900 | |
Interest costs charged to operations and incurred on our long-term debt and lines of credit were $9,000 and $44,000 for the three months ended July 31, 2016 and August 2, 2015, respectively.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Interest costs of $9,000 and $20,000 for the construction of qualifying fixed assets were capitalized and will be amortized over the related assets’ useful lives for the three months ended July 31, 2016 and August 2, 2015, respectively.
11. Net Income Per Share
Basic net income per share is computed using the weighted-average number of shares outstanding during the period. Diluted net income per share uses the weighted-average number of shares outstanding during the period plus the dilutive effect of stock-based compensation calculated using the treasury stock method. Weighted average shares used in the computation of basic and diluted net income per share follows:
| | | |
| | Three months ended | |
(amounts in thousands) | | July 31, 2016 | | | August 2, 2015 | |
Weighted average common shares outstanding, basic | | | 12,286 | | | | 12,277 | |
Dilutive effect of stock-based compensation | | | 177 | | | | 179 | |
Weighted average common shares outstanding, diluted | | | 12,463 | | | | 12,456 | |
All options to purchase shares of common stock were included in the computation of diluted net income for the three months ended July 31, 2016 and August 2, 2015, as the exercise price of the options was less than the average market price of the common shares.
12. Segment Information
Our operations are classified into two business segments: mattress fabrics and upholstery fabrics. The mattress fabrics segment manufactures, sources, and sells fabrics and mattress covers to bedding manufacturers. The upholstery fabrics segment sources, manufactures, and sells fabrics primarily to residential furniture manufacturers.
We evaluate the operating performance of our segments based upon income from operations before certain unallocated corporate expenses and other non-recurring items. Cost of sales in both segments include costs to manufacture or source our products, including costs such as raw material and finished goods purchases, direct and indirect labor, overhead and incoming freight charges. Unallocated corporate expenses primarily represent compensation and benefits for certain executive officers, all costs related to being a public company, and other miscellaneous expenses. Segment assets include assets used in the operations of each segment and primarily consist of accounts receivable, inventories, and property, plant and equipment. The mattress fabrics segment also includes in segment assets, goodwill, a non-compete agreement, and customer relationships associated with an acquisition.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Financial information for the company’s operating segments follows:
| | | |
| | Three months ended | |
(dollars in thousands) | | July 31, 2016 | | | August 2, 2015 | |
Net sales: | | | | | | |
Mattress Fabrics | | $ | 50,530 | | | $ | 47,808 | |
Upholstery Fabrics | | | 30,152 | | | | 32,377 | |
| | $ | 80,682 | | | $ | 80,185 | |
Gross profit: | | | | | | | | |
Mattress Fabrics | | $ | 11,901 | | | $ | 9,925 | |
Upholstery Fabrics | | | 6,518 | | | | 6,277 | |
| | $ | 18,419 | | | $ | 16,202 | |
Selling, general, and administrative expenses: | | | | | | | | |
Mattress Fabrics | | $ | 3,499 | | | $ | 2,923 | |
Upholstery Fabrics | | | 3,534 | | | | 3,595 | |
Total segment selling, general, and | | | | | | | | |
administrative expenses | | | 7,033 | | | | 6,518 | |
Unallocated corporate expenses | | | 2,713 | | | | 2,223 | |
| | $ | 9,746 | | | $ | 8,741 | |
Income from operations: | | | | | | | | |
Mattress Fabrics | | $ | 8,402 | | | $ | 7,003 | |
Upholstery Fabrics | | | 2,984 | | | | 2,681 | |
Total segment income from operations | | | 11,386 | | | | 9,684 | |
Unallocated corporate expenses | | | (2,713 | ) | | | (2,223 | ) |
Total income from operations | | | 8,673 | | | | 7,461 | |
Interest expense | | | - | | | | (24 | ) |
Interest income | | | 25 | | | | 66 | |
Other expense | | | (152 | ) | | | (95 | ) |
Income before income taxes | | $ | 8,546 | | | $ | 7,408 | |
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Balance sheet information for the company’s operating segments follows: | | | | | | | | | |
(dollars in thousands) | | July 31, 2016 | | | August 2, 2015 | | | May 1, 2016 | |
Segment assets: | | | | | | | | | |
Mattress Fabrics | | | | | | | | | |
Current assets (1) | | $ | 39,800 | | | $ | 42,530 | | | $ | 43,472 | |
Non-compete agreement | | | 885 | | | | 960 | | | | 903 | |
Customer relationships | | | 702 | | | | 753 | | | | 715 | |
Goodwill | | | 11,462 | | | | 11,462 | | | | 11,462 | |
Property, plant and equipment (2) | | | 39,435 | | | | 35,116 | | | | 37,480 | |
Total mattress fabrics assets | | | 92,284 | | | | 90,821 | | | | 94,032 | |
Upholstery Fabrics | | | | | | | | | | | | |
Current assets (1) | | | 31,021 | | | | 29,721 | | | | 26,540 | |
Property, plant and equipment (3) | | | 1,459 | | | | 1,518 | | | | 1,564 | |
Total upholstery fabrics assets | | | 32,480 | | | | 31,239 | | | | 28,104 | |
Total segment assets | | | 124,764 | | | | 122,060 | | | | 122,136 | |
Non-segment assets: | | | | | | | | | | | | |
Cash and cash equivalents | | | 45,549 | | | | 25,933 | | | | 37,787 | |
Short-term investments | | | 2,434 | | | | 6,336 | | | | 4,359 | |
Deferred income taxes | | | 1,942 | | | | 4,406 | | | | 2,319 | |
Income taxes receivable | | | - | | | | 142 | | | | 155 | |
Other current assets | | | 2,294 | | | | 3,502 | | | | 2,477 | |
Property, plant and equipment (4) | | | 851 | | | | 846 | | | | 929 | |
Long-term investments | | | 4,611 | | | | 2,893 | | | | 4,025 | |
Other assets | | | 915 | | | | 762 | | | | 955 | |
Total assets | | $ | 183,360 | | | $ | 166,880 | | | $ | 175,142 | |
| | | |
| | Three months ended | |
(dollars in thousands) | | July 31, 2016 | | | August 2, 2015 | |
Capital expenditures (5): | | | | | | |
Mattress Fabrics | | $ | 3,521 | | | $ | 2,704 | |
Upholstery Fabrics | | | 14 | | | | 183 | |
Unallocated Corporate | | | 8 | | | | 73 | |
Total capital expenditures | | $ | 3,543 | | | $ | 2,960 | |
Depreciation expense: | | | | | | | | |
Mattress Fabrics | | $ | 1,556 | | | $ | 1,359 | |
Upholstery Fabrics | | | 205 | | | | 196 | |
Total depreciation expense | | $ | 1,761 | | | $ | 1,555 | |
(1) | Current assets represent accounts receivable and inventory for the respective segment. |
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2) | Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, which amends ASC Topic 606, Revenue from Contracts with Customers.The $39.4amendments in this ASU are intended to enhance the comparability of revenue recognition practices and will be applied to all contracts with customers. Improved disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized are requirements under the amended guidance. In April 2015, the FASB issued ASU 2015-24, Revenue from Contracts with Customers: Deferral of the Effective Date which proposed a deferral of the effective date by one year, and on July 7, 2015, the FASB decided to delay the effective date by one year. The deferral results in the new revenue standard being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We are therefore required to apply the new revenue guidance in our fiscal 2019 interim and annual financial statements. This ASU can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently assessing the impact that this guidance will have on our consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which changed the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. This ASU is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2016. We are therefore required to apply this guidance in our fiscal 2018 interim and annual financial statements. We are currently assessing the impact that this guidance will have on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which increases transparency and comparability among companies accounting for lease transactions. The most significant change of this update will require the recognition of lease assets and liabilities on the balance sheet for operating lease arrangements with lease terms greater than twelve months for lessees. This update will require a modified retrospective application which includes a number of optional practical expedients related to the identification and classification of leases commenced before the effective date. This ASU is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018. We are therefore required to apply this guidance in our fiscal 2020 interim and annual financial statements. We are currently assessing the impact that this guidance will have on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Shares-Based Payment Accounting." ASU 2016-09 is intended to improve the accounting for share-based payment transactions as part of the FASB’s simplification initiative. ASU 2016-09 changes several aspects of the accounting for share-based payment award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those years for public companies. We are therefore required to apply this guidance in our fiscal 2018 interim and annual financial statements. We are currently assessing the impact that ASU 2016-09 will have on its consolidated financial statements. Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address the diversity in how certain cash receipts and cash payments are presented in the statement of cash flows. This new guidance provides clarity around the cash flow classification for eight specific issues in an effort to reduce the current and potential future diversity in practice. This standard, which is to be applied retrospectively, will be effective for the first interim period within annual reporting periods beginning after December 15, 2017, and early adoption is permitted. We are therefore required to apply this new guidance in our fiscal 2019 interim and annual financial statements. We are currently assessing the impact that this guidance will have on our consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Than Inventory, to reduce the diversity in practice and complexity associated with accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current GAAP prohibits recognition of deferred income taxes for an intra-entity transfer until the asset has been sold to an outside party. The new pronouncement stipulates that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This new guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods, with early adoption permitted in the first interim period only. We are therefore required to apply this new guidance in our fiscal 2019 interim and annual financial statements. The amendments are to applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We are currently assessing the impact that this guidance will have on our consolidated financial statements.
There are no other new accounting pronouncements that are expected to have a significant impact on our consolidated financial statements.
3. Stock-Based Compensation
Equity Incentive Plan Description
On September 16, 2015, our shareholders approved an equity incentive plan entitled the Culp, Inc. 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan updated and replaced our 2007 Equity Incentive Plan (the “2007 Plan”) as the vehicle for granting new equity based awards substantially similar to those authorized under the 2007 Plan. In general, the 2015 Plan authorizes the grant of stock options intended to qualify as incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, and other equity and cash related awards as determined by our Compensation Committee. An aggregate of 1,200,000 shares of common stock were authorized for issuance under the 2015 Plan, with certain sub-limits that would apply with respect to specific types of awards that may be issued as defined in the 2015 Plan. In connection with the approval of the 2015 Plan, no further awards will be granted under the 2007 Plan, but outstanding awards under the 2007 Plan will be settled in accordance with their terms.
At January 29, 2017, there were 959,942 shares available for future equity based grants under our 2015 plan. Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Incentive Stock Option Awards
We did not grant any incentive stock option awards through the through the third quarter of fiscal 2017.
At January 29, 2017, options to purchase 78,600 shares of common stock were outstanding and exercisable, had a weighted average exercise price of $8.43 per share, and a weighted average contractual term of 0.6 years. At January 29, 2017, the aggregate intrinsic value for options outstanding and exercisable was $2.0 million.
The aggregate intrinsic value for options exercised for the nine months ending January 29, 2017 and January 31, 2016, was $128,000 and $1.0 million, respectively.
At January 29, 2017, there were no unvested incentive stock option awards. Therefore, there was no unrecognized compensation cost related to incentive stock option awards at January 29, 2017.
No compensation expense was recorded for incentive stock options for the nine months ended January 29, 2017 and January 31, 2016, respectively.
Common Stock Awards
On October 3, 2016, we granted a total of 4,800 shares of common stock to our outside directors. These shares of common stock vest immediately and were measured at $29.80 per share, which represents the closing price of our common stock at the date of grant.
On October 1, 2015, we granted a total of 3,000 shares of common stock to our outside directors. These shares of common stock vest immediately and were measured at $31.77 per share, which represents the closing price of our common stock at the date of grant.
We recorded $143,000 and $95,000 within selling, general, and administrative expense for these common stock awards for the nine months ending January 29, 2017, and January 31, 2016, respectively.
Performance Based Restricted Stock Units Fiscal 2017 Grants
On July 14, 2016, certain key members of management were granted performance-based restricted stock units which could earn up to 107,880 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. These awards were valued based on the fair market value on the date of grant. The fair value of these awards was $28 per share, which represents the closing price of our common stock on the date of grant. The vesting of these awards is over the requisite service period of three years.
On July 14, 2016, a non-employee was granted performance-based restricted stock units which could earn up to 11,549 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreement. The fair value of this award is measured at the earlier date of when the performance criteria are met or the end of the reporting period. At January 29, 2017, this grant was unvested and was measured at $33.80 per share, which represents the closing price of our common stock at the end of the reporting period. The vesting of this award is over the requisite service period of three years. Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Fiscal 2016 Grants
On July 15, 2015, certain key members of management were granted performance-based restricted stock units which could earn up to 107,554 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. These awards were valued based on the fair market value on the date of grant. The fair value of these awards was $32.23 per share, which represents the closing price of our common stock on the date of grant. The vesting of these awards is over the requisite service period of three years.
On July 15, 2015, a non-employee was granted performance-based restricted stock units which could earn up to 10,364 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreement. The fair value of this award is measured at the earlier date of when the performance criteria are met or the end of the reporting period. At January 29, 2017, this grant was unvested and was measured at $33.80 per share, which represents the closing price of our common stock at the end of the reporting period. The vesting of this award is over the requisite service period of three years. Fiscal 2015 Grants
On June 24, 2014, certain key members of management were granted performance-based restricted stock units which could earn up to 102,845 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. These awards were valued based on the fair market value on the date of grant. The fair value of these awards was $17.70 per share, which represents the closing price of our common stock on the date of grant. The vesting of these awards is over the requisite service period of three years.
On March 3, 2015, a non-employee was granted performance-based restricted stock units which could earn up to 28,000 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. The fair value of this award is measured at the earlier date of when the performance criteria are met or the end of the reporting period. At January 29, 2017, 16,000 restricted stock units associated with this grant were unvested and were measured at $33.80 per share, which represents the closing price of the company’s common stock at the end of the reporting period. The vesting of these 16,000 restricted stock units vest over their requisite service period of 28 months. During the first quarter of fiscal 2017, 12,000 shares of common stock associated with the grant vested and had a weighted average fair value of $345,000 or $28.77 per share.
2014 Grant
On June 25, 2013, certain key members of management were granted performance-based restricted stock units which could earn up to 72,380 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. These awards were valued based on the fair market value on the date of grant. The fair value of these awards was $17.12 per share, which represents the closing price of our common stock on the date of grant. The vesting of these awards is over the requisite service period of three years. Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) During the first quarter of fiscal 2017, 37,192 shares of common stock associated with this grant vested and had a weighted average fair value of $637,000 or $17.12 per share. Our fiscal 2014 grant is fully vested.
Fiscal 2013 Grant
On July 11, 2012, certain key members of management were granted performance based restricted stock units which could earn up to 120,000 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. These awards were valued based on the fair market value on the date of grant. The fair value of these awards was $10.21 per share, which represents the closing price of our common stock on the date of grant. The vesting of these awards is over the requisite service period of three years. During the first quarter of fiscal 2016, 115,855 shares of common stock associated with our fiscal 2013 grant vested and had a weighted average fair value of $1.2 million or $10.21 per share. Our fiscal 2013 grant is fully vested. Overall
We recorded compensation expense of $2.5 million and $1.9 million within selling, general, and administrative expense for our performance based restricted stock unit awards for the nine month periods ending January 29, 2017 and January 31, 2016, respectively. Compensation cost is recorded based on an assessment each reporting period of the probability if certain performance goals will be met during the vesting period. If performance goals are not probable of occurrence, no compensation cost will be recognized and any recognized compensation cost would be reversed.
As of January 29, 2017, the remaining unrecognized compensation cost related to our performance based restricted stock unit awards was $4.8 million, which is expected to be recognized over a weighted average vesting period of 1.9 years.
Time Vested Restricted Stock Units
On July 14, 2016, an employee was granted 1,200 shares of time vested restricted stock units. This award was valued based on the fair market value on the date of grant. The fair value of this award was $28 per share, which represents the closing price of our common stock on the date of grant. The vesting of this award is over the requisite service period of 11 months.
We recorded compensation expense of $20,000 within selling, general, and administrative expense for our time vested restricted stock unit awards for the nine months ending January 29, 2017. There were not any time vested restricted stock unit awards granted or unvested during the nine months ending January 31, 2016 and, therefore, no compensation expense was recorded.
At January 29, 2017, the remaining unrecognized compensation cost related to unvested time vested restricted stock awards was $14,000, which is expected to be recognized over the next 4.5 months.
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 4. Accounts Receivable
A summary of accounts receivable follows: | | | | | | | | | | (dollars in thousands) | | January 29, 2017 | | | January 31, 2016 | | | May 1, 2016 | | Customers | | $ | 24,339 | | | $ | 28,684 | | | $ | 25,531 | | Allowance for doubtful accounts | | | (397 | ) | | | (814 | ) | | | (1,088 | ) | Reserve for returns and allowances and discounts | | | (1,216 | ) | | | (1,086 | ) | | | (962 | ) | | | $ | 22,726 | | | $ | 26,784 | | | $ | 23,481 | |
A summary of the activity in the allowance for doubtful accounts follows: | | | | | | | | | Nine months ended | | (dollars in thousands) | | January 29, 2017 | | | January 31, 2016 | | Beginning balance | | $ | (1,088 | ) | | $ | (851 | ) | Provision for bad debts | | | 239 | | | | (93 | ) | Net write-offs, net of recoveries | | | 452 | | | | 130 | | Ending balance | | $ | (397 | ) | | $ | (814 | ) |
A summary of the activity in the allowance for returns and allowances and discounts accounts follows: | | | | | | | | | Nine months ended | | (dollars in thousands) | | January 29, 2017 | | | January 31, 2016 | | Beginning balance | | $ | (962 | ) | | $ | (738 | ) | Provision for returns, allowances | | | | | | | | | and discounts | | | (2,357 | ) | | | (2,389 | ) | Credits issued | | | 2,103 | | | | 2,041 | | Ending balance | | $ | (1,216 | ) | | $ | (1,086 | ) |
5. Inventories
Inventories are carried at the lower of cost or market. Cost is determined using the FIFO (first-in, first-out) method.
A summary of inventories follows: | | | | | | | | | | (dollars in thousands) | | January 29, 2017 | | | January 31, 2016 | | | May 1, 2016 | | Raw materials | | $ | 6,977 | | | $ | 6,831 | | | $ | 5,462 | | Work-in-process | | | 3,161 | | | | 3,365 | | | | 2,972 | | Finished goods | | | 36,055 | | | | 38,289 | | | | 38,097 | | | | $ | 46,193 | | | $ | 48,485 | | | $ | 46,531 | |
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 6. Other Assets
A summary of other assets follows: | | | | | | | | | | (dollars in thousands) | | January 29, 2017 | | | January 31, 2016 | | | May 1, 2016 | | Cash surrender value – life insurance | | $ | 376 | | | $ | 357 | | | $ | 357 | | Non-compete agreement, net | | | 847 | | | | 922 | | | | 903 | | Customer relationships, net | | | 677 | | | | 728 | | | | 715 | | Other | | | 517 | | | | 428 | | | | 598 | | | | $ | 2,417 | | | $ | 2,435 | | | $ | 2,573 | |
Non-Compete Agreement
We recorded our non-compete agreement at its fair value based on a discounted cash flow valuation model. Our non-compete agreement is amortized on a straight-line basis over the fifteen year life of the respective agreement.
The gross carrying amount of our non-compete agreement was $2.0 million at JulyJanuary 29, 2017, January 31, 2016 represents property, plant, and equipment of $25.5 million and $13.9 million located in the U.S. and Canada, respectively. The $35.1 million at August 2, 2015, represents property, plant, and equipment of $23.6 million and $11.5 million located in the U.S. and Canada, respectively. The $37.5 million at May 1, 2016, represents property, plant, and equipment of $24.8 million and $12.7 million located in the U.S. and Canada, respectively. |
(3) | The $1.5 million at July At January 29, 2017, January 31, 2016, represents property, plant, and equipment of $847 and $612 located in the U.S. and China, respectively. The $1.5 million at August 2, 2015, represents property, plant, and equipment of $818 and $700 located in the U.S. and China, respectively. The $1.6 million at May 1, 2016, represents property, plant,accumulated amortization for our non-compete agreement was $1.2 million, $1.1 million, and equipment of $893 and $671 located in the U.S. and China,$1.1 million, respectively. |
(4) | Amortization expense for our non-compete agreement was $56,000 for the nine month periods ended January 29, 2017 and January 31, 2016. The $851, $846,remaining amortization expense for the next five fiscal years and $929thereafter follows: FY 2017 - $18,000; FY 2018 - $75,000; FY 2019- $75,000; FY 2020 - $75,000; FY 2021 - $75,000 and Thereafter - $529,000.
The weighted average amortization period for our non-compete agreement is 11.3 years as of January 29, 2017.
Customer Relationships
We recorded our customer relationships at Julytheir fair value based on a multi-period excess earnings valuation model. Our customer relationships are amortized on a straight-line basis over its seventeen year useful life.
The gross carrying amount of our customer relationships was $868,000 at January 29, 2017, January 31, 2016, August 2, 2015and May 1, 2016, respectively. Accumulated amortization for our customer relationships was $191,000, $140,000, and $153,000 at January 29, 2017, January 31, 2016, and May 1, 2016, respectively.
Amortization expense for our customer relationships was $38,000 for the nine months ending January 29, 2017 and January 31, 2016. The remaining amortization expense for the next five fiscal years and thereafter follows: FY 2017 - $13,000; FY 2018 - $51,000; FY 2019 - $51,000; FY 2020 - $51,000; FY 2021 - $51,000; and Thereafter - $460,000.
The weighted average amortization period for our customer relationships is 13.3 years as of January 29, 2017.
Cash Surrender Value – Life Insurance
At January 29, 2017, January 31, 2016, and May 1, 2016 we had one life insurance contract with a death benefit of $1.4 million. Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Our cash surrender value – life insurance balances totaling $376,000, $357,000 and $357,000 at January 29, 2017, January 31, 2016, and May 1, 2016, respectively, are collectible upon death of the respective insured.
7. Accrued Expenses
A summary of accrued expenses follows: | | | | | | | | | | (dollars in thousands) | | January 29, 2017 | | | January 31, 2016 | | | May 1, 2016 | | Compensation, commissions and related benefits | | $ | 9,205 | | | $ | 8,678 | | | $ | 10,011 | | Advertising rebates | | | 118 | | | | 2,876 | | | | 870 | | Interest | | | 11 | | | | - | | | | - | | Other accrued expenses | | | 1,177 | | | | 1,136 | | | | 1,041 | | | | $ | 10,511 | | | $ | 12,690 | | | $ | 11,922 | |
8. Lines of Credit
Revolving Credit Agreement – United States
Our Credit Agreement with Wells Fargo Bank, N.A. (“Wells Fargo”) provides a revolving loan commitment of $30 million. Interest was charged at a rate (applicable interest rate of 2.23% at January 29, 2017) as a variable spread over LIBOR based on our ratio of debt to EBITDA. The Credit Agreement contains certain financial and other covenants as defined in the agreement and is set to expire on August 15, 2018.
The purposes of our revolving credit line is to support potential short term cash needs in different jurisdictions within our global operations, mitigate our risk associated with foreign currency exchange rate fluctuations, and ultimately repatriate earnings and profits from our foreign subsidiaries to the U.S. for various strategic purposes.
Outstanding borrowings are secured by a pledge of 65% of the common stock of Culp International Holdings Ltd. (our subsidiary located in the Cayman Islands), as required by the Credit Agreement. There were no borrowings outstanding under the Credit Agreement at January 29, 2017, January 31, 2016, and May 1, 2016, respectively.
At January 29, 2017, January 31, 2016, and May 1, 2016, there were $250,000 in outstanding letters of credit (all of which related to workers compensation) provided by the Credit Agreement.
Effective August 1, 2016, we entered into a Third Amendment to our Credit Agreement that will allow us to issue letters of credit not to exceed $7.5 million. On August 3, 2016, we issued a $5.0 million letter of credit (all of which is currently outstanding and in addition to the $250,000 letter of credit noted above) for the construction of a new building associated with our mattress fabrics segment (see Note 15 for further details). This $5.0 million letter of credit will be automatically reduced in increments of $1.25 million on August 1, 2017, November 1, 2017, February 1, 2018, and May 15, 2018, respectively.
Revolving Credit Agreement – China
We have an unsecured credit agreement associated with our operations in China that provides for a line of credit of up to 40 million Chinese Yuan Renminbi (approximately $5.8 million USD at January 29, 2017), that expires February 15, 2018. This agreement has an interest rate determined by the Chinese government and there were no borrowings outstanding as of January 29, 2017, January 31, 2016, and May 1, 2016. Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Overall
Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. At January 29, 2017, the company was in compliance with these financial covenants.
9. Fair Value of Financial Instruments
ASC Topic 820 establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and the company’s assumptions (unobservable inputs). Determining where an asset or liability falls within that hierarchy depends on the lowest level input that is significant to the fair value measurement as a whole. An adjustment to the pricing method used within either level 1 or level 2 inputs could generate a fair value measurement that effectively falls in a lower level in the hierarchy. The hierarchy consists of three broad levels as follows:
Level 1 – Quoted market prices in active markets for identical assets or liabilities;
Level 2 – Inputs other than level 1 inputs that are either directly or indirectly observable, and
Level 3 – Unobservable inputs developed using the company’s estimates and assumptions, which reflect those that market participants would use.
Recurring Basis
The following table presents information about assets measured at fair value on a recurring basis:
| | | Fair value measurements at January 29, 2017 using: | | | | | | | | | | Quoted prices in active markets for identical assets | | | Significant other observable inputs | | | Significant unobservable inputs | | | | | (amounts in thousands) | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | | | | | | | | | | | | | | Assets: | | | | | | | | | | | | | | U.S. Corporate Bonds | | | $ | - | | | $ | 30,682 | | | | N/A | | | $ | 30,682 | | Premier Money Market Fund | | | | 4,888 | | | | N/A | | | | N/A | | | | 4,888 | | Low Duration Bond Fund | | | | 1,073 | | | | N/A | | | | N/A | | | | 1,073 | | Intermediate Term Bond Fund | | | | 739 | | | | N/A | | | | N/A | | | | 739 | | Strategic Income Fund | | | | 598 | | | | N/A | | | | N/A | | | | 598 | | Large Blend Fund | | | | 343 | | | | N/A | | | | N/A | | | | 343 | | Growth Allocation Fund | | | | 113 | | | | N/A | | | | N/A | | | | 113 | | Moderate Allocation Fund | | | | 83 | | | | N/A | | | | N/A | | | | 83 | | Other | | | | 61 | | | | N/A | | | | N/A | | | | 61 | |
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) | | | Fair value measurements at January 31, 2016 using: | | | | | Quoted prices in active markets for identical assets | | | Significant other observable inputs | | | Significant unobservable inputs | | | | | (amounts in thousands) | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | | | | | | | | | | | | | | Assets: | | | | | | | | | | | | | | Premier Money Market Fund | | | $ | 3,071 | | | | N/A | | | | N/A | | | $ | 3,071 | | Low Duration Bond Fund | | | | 1,592 | | | | N/A | | | | N/A | | | | 1,592 | | Intermediate Term Bond Fund | | | | 1,116 | | | | N/A | | | | N/A | | | | 1,116 | | Strategic Income Fund | | | | 957 | | | | N/A | | | | N/A | | | | 957 | | Limited Term Bond Fund | | | | 594 | | | | N/A | | | | N/A | | | | 594 | | Large Blend Fund | | | | 254 | | | | N/A | | | | N/A | | | | 254 | | Growth Allocation Fund | | | | 128 | | | | N/A | | | | N/A | | | | 128 | | Mid Cap Value Fund | | | | 90 | | | | N/A | | | | N/A | | | | 90 | | Other | | | | 47 | | | | N/A | | | | N/A | | | | 47 | |
| | | Fair value measurements at May 1, 2016 using: | | | | | Quoted prices in active markets for identical assets | | | Significant other observable inputs | | | Significant unobservable inputs | | | | | (amounts in thousands) | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | | | | | | | | | | | | | | Assets: | | | | | | | | | | | | | | Premier Money Market Fund | | | $ | 3,404 | | | | N/A | | | | N/A | | | $ | 3,404 | | Low Duration Bond Fund | | | | 1,604 | | | | N/A | | | | N/A | | | | 1,604 | | Intermediate Term Bond Fund | | | | 1,154 | | | | N/A | | | | N/A | | | | 1,154 | | Strategic Income Fund | | | | 999 | | | | N/A | | | | N/A | | | | 999 | | Limited Term Bond Fund | | | | 602 | | | | N/A | | | | N/A | | | | 602 | | Large Blend Fund | | | | 289 | | | | N/A | | | | N/A | | | | 289 | | Growth Allocation Fund | | | | 148 | | | | N/A | | | | N/A | | | | 148 | | Mid Cap Value Fund | | | | 102 | | | | N/A | | | | N/A | | | | 102 | | Other | | | | 82 | | | | N/A | | | | N/A | | | | 82 | |
The determination of where an asset or liability falls in the hierarchy requires significant judgment. We evaluate our hierarchy disclosures each quarter based on various factors and it is possible that an asset or liability may be classified differently from quarter to quarter. However, we expect that changes in classifications between different levels will be rare.
Short-Term Investments
At January 29, 2017, January 31, 2016, and May 1, 2016, our short-term investments totaled $2.4 million, $4.3 million, and $4.4 million, respectively, and consisted of short-term bond funds. Our short-term bond funds are recorded at their fair value, are classified as available-for-sale, and their unrealized gains or losses are included in other comprehensive income (loss). Our short-term bond investments had an accumulated unrealized loss totaling $68,000, $181,000, and $100,000 at January 29, 2017, January 31, 2016, and May 1, 2016, respectively. At January 29, 2017, January 31, 2016, and May 1, 2016, the fair value of our short-term bond funds approximated its cost basis.
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Long- Term Investments - Held-To-Maturity
During the second quarter of fiscal 2017, management decided to invest approximately $31.0 million in investment grade U.S. Corporate bonds with maturities primarily ranging from 2 to 2.5 years. The purpose of this investment was to earn a higher rate of return on our excess cash located in the Cayman Islands. These investments are classified as held-to-maturity as we have the positive intent and ability to hold these investments until maturity. Our held-to-maturity investments will be recorded as either current or noncurrent on our Consolidated Balance Sheets, based on contractual maturity date and stated at amortized cost.
At January 29, 2017, our held-to-maturity investments totaled $30.8 million and consisted of U.S. Corporate bonds. The fair value of our held-to-maturity investments totaled $30.7 million.
Long-Term Investments - Rabbi Trust
Effective January 1, 2014, we established a Rabbi Trust to set aside funds for participants of our deferred compensation plan (the “Plan”) and enable the participants to credit their contributions to various investment options of the Plan. The investments associated with the Rabbi Trust consist of a money market fund and various mutual funds that are classified as available for sale.
Our long-term investments are recorded at their fair value of $5.5 million, $3.6 million, and $4.0 million at January 29, 2017, January 30, 2016, and May 1, 2016, respectively. Our long-term investments had an accumulated unrealized gain of $11,000 at January 29, 2017 and an accumulated unrealized loss of $99,000 and $44,000 at January 31, 2016 and May 1, 2016, respectively. The fair value of our long-term investments associated with our Rabbi Trust approximates its cost basis.
Other The carrying amount of cash and cash equivalents, accounts receivable, other current assets, accounts payable, and accrued expenses approximates fair value because of the short maturity of these financial instruments.
10. Cash Flow Information
Interest and income taxes paid are as follows: | | | | | | | | | Nine months ended | | (dollars in thousands) | | January 29, 2017 | | | January 31, 2016 | | Interest | | $ | 110 | | | $ | 95 | | Income taxes | | | 4,704 | | | | 4,921 | |
Interest costs charged to operations were $97,000 and $58,000 for the nine months ended January 29, 2017 and January 31, 2016, respectively. Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Interest costs of $97,000 and $58,000 for the construction of qualifying fixed assets were capitalized and will be amortized over the related assets’ useful lives for the nine months ended January 29, 2017 and January 31, 2016, respectively.
11. Net Income Per Share
Basic net income per share is computed using the weighted-average number of shares outstanding during the period. Diluted net income per share uses the weighted-average number of shares outstanding during the period plus the dilutive effect of stock-based compensation calculated using the treasury stock method. Weighted average shares used in the computation of basic and diluted net income per share follows: | | | | | | | | | Three months ended | | (amounts in thousands) | | January 29, 2017 | | | January 31, 2016 | | Weighted average common shares outstanding, basic | | | 12,313 | | | | 12,331 | | Dilutive effect of stock-based compensation | | | 231 | | | | 155 | | Weighted average common shares outstanding, diluted | | | 12,544 | | | | 12,486 | |
All options to purchase shares of common stock were included in the computation of diluted net income for the three months ended January 29, 2017 and January 31, 2016, as the exercise price of the options was less than the average market price of the common shares. | | | | | | | | | Nine months ended | | (amounts in thousands) | | January 29, 2017 | | | January 31, 2016 | | Weighted average common shares outstanding, basic | | | 12,302 | | | | 12,317 | | Dilutive effect of stock-based compensation | | | 215 | | | | 171 | | Weighted average common shares outstanding, diluted | | | 12,517 | | | | 12,488 | |
All options to purchase shares of common stock were included in the computation of diluted net income for the nine months ended January 29, 2017 and January 31, 2016, as the exercise price of the options was less than the average market price of the common shares.
12. Segment Information
Our operations are classified into two business segments: mattress fabrics and upholstery fabrics. The mattress fabrics segment manufactures, sources, and sells fabrics and mattress covers to bedding manufacturers. The upholstery fabrics segment sources, manufactures, and sells fabrics primarily to residential furniture manufacturers. Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) We evaluate the operating performance of our segments based upon income from operations before certain unallocated corporate expenses and other non-recurring items. Cost of sales in both segments include costs to manufacture or source our products, including costs such as raw material and finished goods purchases, direct and indirect labor, overhead and incoming freight charges. Unallocated corporate expenses primarily represent compensation and benefits for certain executive officers, all costs related to being a public company, and other miscellaneous expenses. Segment assets include assets used in the operations of each segment and primarily consist of accounts receivable, inventories, and property, plant and equipmentequipment. The mattress fabrics segment also includes in segment assets, investment in an unconsolidated joint venture, goodwill, a non-compete agreement, and customer relationships associated with unallocated corporate departments and corporate departments shared by both the mattress and upholstery fabric segments. Property, plant, and equipment associated with corporate are located in the U.S. |
an acquisition.
(5) | Capital expenditure amounts are stated on
Financial information for the accrual basis. See Consolidated Statements of Cash Flowscompany’s operating segments follows: | | | | | | | | | Three months ended | | (dollars in thousands) | | January 29, 2017 | | | January 31, 2016 | | Net sales: | | | | | | | Mattress Fabrics | | $ | 45,920 | | | $ | 44,277 | | Upholstery Fabrics | | | 30,249 | | | | 34,189 | | | | $ | 76,169 | | | $ | 78,466 | | Gross profit: | | | | | | | | | Mattress Fabrics | | $ | 9,758 | | | $ | 8,751 | | Upholstery Fabrics | | | 7,001 | | | | 7,812 | | | | $ | 16,759 | | | $ | 16,563 | | Selling, general, and administrative expenses: | | | | | | | | | Mattress Fabrics | | $ | 3,391 | | | $ | 2,953 | | Upholstery Fabrics | | | 3,901 | | | | 3,963 | | Total segment selling, general, and | | | | | | | | | administrative expenses | | | 7,292 | | | | 6,916 | | Unallocated corporate expenses | | | 2,532 | | | | 2,421 | | | | $ | 9,824 | | | $ | 9,337 | | Income from operations: | | | | | | | | | Mattress Fabrics | | $ | 6,367 | | | $ | 5,798 | | Upholstery Fabrics | | | 3,100 | | | | 3,849 | | Total segment income from operations | | | 9,467 | | | | 9,647 | | Unallocated corporate expenses | | | (2,532 | ) | | | (2,421 | ) | Total income from operations | | | 6,935 | | | | 7,226 | | Interest income | | | 124 | | | | 38 | | Other expense | | | (69 | ) | | | (85 | ) | Income before income taxes | | $ | 6,990 | | | $ | 7,179 | |
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) | | | | | | | | | Nine months ended | | (dollars in thousands) | | January 29, 2017 | | | January 31, 2016 | | Net sales: | | | | | | | Mattress Fabrics | | $ | 141,977 | | | $ | 137,522 | | Upholstery Fabrics | | | 90,217 | | | | 98,085 | | | | $ | 232,914 | | | $ | 235,607 | | Gross profit: | | | | | | | | | Mattress Fabrics | | $ | 32,414 | | | $ | 28,133 | | Upholstery Fabrics | | | 19,665 | | | | 20,365 | | | | $ | 52,079 | | | $ | 48,498 | | Selling, general, and administrative expenses: | | | | | | | | | Mattress Fabrics | | $ | 10,185 | | | $ | 8,865 | | Upholstery Fabrics | | | 11,086 | | | | 11,372 | | Total segment selling, general, and | | | | | | | | | administrative expenses | | | 21,271 | | | | 20,237 | | Unallocated corporate expenses | | | 7,900 | | | | 7,275 | | | | $ | 29,171 | | | $ | 27,512 | | Income from operations: | | | | | | | | | Mattress Fabrics | | $ | 22,229 | | | $ | 19,267 | | Upholstery Fabrics | | | 8,579 | | | | 8,994 | | Total segment income from operations | | | 30,808 | | | | 28,261 | | Unallocated corporate expenses | | | (7,900 | ) | | | (7,275 | ) | Total income from operations | | | 22,908 | | | | 20,986 | | Interest income | | | 164 | | | | 150 | | Other expense | | | (376 | ) | | | (405 | ) | Income before income taxes | | $ | 22,696 | | | $ | 20,731 | |
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Balance sheet information for capital expenditure amounts on a cash basis.
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13. Income Taxes
Effective Income Tax Rate
We recorded income tax expense of $3.2 million, or 37.8% of income before income taxes, for the three month period ended July 31, 2016, compared to income tax expense of $2.7 million, or 36.5% of income before income taxes, for the three month period ended August 2, 2015. Our effective income tax rates for the three month periods ended July 31, 2016, and August 2, 2015, were based upon the estimated effective income tax rate applicable for the full year after giving effect to any significant items related specifically to interim periods. The effective income tax rate can be affected over the fiscal year by the mix and timing of actual earnings from our U.S. operations and foreign sources versus annual projections and changes in foreign currency exchange rates in relation to the U.S. dollar.
The following schedule summarizes the factors that are attributable to the difference between income tax expense at the federal income tax rate and the effective income tax rate reflected in the consolidated financial statements:
| | 2017 | | | 2016 | |
federal income tax rate | | | 34.0 | % | | | 34.0 | % |
U.S state income tax expense | | | 1.4 | | | | 0.8 | |
tax effects of Chinese foreign exchange gains | | | 1.1 | | | | 0.4 | |
increase in liability for uncertain tax positions | | | 0.5 | | | | 0.3 | |
other | | | 0.8 | | | | 1.0 | |
| | | 37.8 | % | | | 36.5 | % |
I -20the company’s operating segments follows:
| | | | | | | | | |
(dollars in thousands) | | January 29, 2017 | | | January 31, 2016 | | | May 1, 2016 | |
Segment assets: | | | | | | | | | |
Mattress Fabrics | | | | | | | | | |
Current assets (1) | | $ | 41,498 | | | $ | 44,309 | | | $ | 43,472 | |
Non-compete agreement | | | 847 | | | | 922 | | | | 903 | |
Customer relationships | | | 677 | | | | 728 | | | | 715 | |
Investment in unconsolidated joint venture | | | 600 | | | | - | | | | - | |
Goodwill | | | 11,462 | | | | 11,462 | | | | 11,462 | |
Property, plant and equipment (2) | | | 47,755 | | | | 35,637 | | | | 37,480 | |
Total mattress fabrics assets | | | 102,839 | | | | 93,058 | | | | 94,032 | |
Upholstery Fabrics | | | | | | | | | | | | |
Current assets (1) | | | 27,421 | | | | 30,960 | | | | 26,540 | |
Property, plant and equipment (3) | | | 1,826 | | | | 1,590 | | | | 1,564 | |
Total upholstery fabrics assets | | | 29,247 | | | | 32,550 | | | | 28,104 | |
Total segment assets | | | 132,086 | | | | 125,608 | | | | 122,136 | |
Non-segment assets: | | | | | | | | | | | | |
Cash and cash equivalents | | | 15,659 | | | | 31,713 | | | | 37,787 | |
Short-term investments | | | 2,410 | | | | 4,259 | | | | 4,359 | |
Deferred income taxes | | | 422 | | | | 4,312 | | | | 2,319 | |
Income taxes receivable | | | - | | | | 23 | | | | 155 | |
Other current assets | | | 2,514 | | | | 2,331 | | | | 2,477 | |
Property, plant and equipment (4) | | | 752 | | | | 930 | | | | 929 | |
Long-term investments (Held-to-Maturity) | | | 30,832 | | | | - | | | | - | |
Long-term investments (Rabbi Trust) | | | 5,488 | | | | 3,590 | | | | 4,025 | |
Other assets | | | 893 | | | | 785 | | | | 955 | |
Total assets | | $ | 191,056 | | | $ | 173,551 | | | $ | 175,142 | |
| | | | | | |
| | Nine months ended | |
(dollars in thousands) | | January 29, 2017 | | | January 31, 2016 | |
Capital expenditures (5): | | | | | | |
Mattress Fabrics | | $ | 14,957 | | | $ | 6,215 | |
Upholstery Fabrics | | | 645 | | | | 481 | |
Unallocated Corporate | | | 72 | | | | 381 | |
Total capital expenditures | | $ | 15,674 | | | $ | 7,077 | |
Depreciation expense: | | | | | | | | |
Mattress Fabrics | | $ | 4,673 | | | $ | 4,273 | |
Upholstery Fabrics | | | 631 | | | | 615 | |
Total depreciation expense | | $ | 5,304 | | | $ | 4,888 | |
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Deferred Income Taxes
Valuation Allowance
In accordance with ASC Topic 740, we evaluate our deferred income taxes to determine if a valuation allowance is required. ASC Topic 740 requires that companies assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more-likely-than-not” standard, with significant weight being given to evidence that can be objectively verified. Since the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-by-jurisdiction basis, taking into account the effects of local tax law. Based on our assessment at July 31, 2016, we recorded a partial valuation allowance of $625,000, of which $539,000 pertained to certain U.S. state net operating loss carryforwards and credits and $86,000 pertained to loss carryfowards associated with our Culp Europe operation located in Poland. Based on our assessment at August 2, 2015, we recorded a partial valuation allowance of $926,000, of which $561,000 pertained to certain U.S. state net operating loss carryforwards and credits and $365,000 pertained to loss carryfowards associated with our Culp Europe operation located in Poland. Based on our assessment at May 1, 2016, we recorded a partial valuation allowance of $590,000, of which $518,000 pertained to certain U.S. state net operating loss carryforwards and credits and $72,000 pertained to loss carryfowards associated with our Culp Europe operation located in Poland.
No valuation allowance was recorded against our net deferred tax assets associated with our operations located in China and Canada at July 31, 2016, August 2, 2015, and May 1, 2016, respectively.
The recorded valuation allowance of $625,000 at July 31, 2016, has no effect on our operations, loan covenant compliance, or the possible realization of certain U.S. state net operating loss carryforwards and credits and our loss carryforwards associated with our Culp Europe operation located in Poland. If it is determined that it is more-likely-than-not that we will realize any of these deferred tax assets, an income tax benefit will be recognized at that time.
Undistributed Earnings
In accordance with ASC Topic 740, we assess whether the undistributed earnings from our foreign subsidiaries will be reinvested indefinitely or eventually distributed to our U.S. parent company. ASC Topic 740 requires that a deferred tax liability should be recorded for undistributed earnings from foreign subsidiaries that will not be reinvested indefinitely. Based on our assessment as of July 31, 2016, it is our intention not to permanently invest our undistributed earnings from our foreign subsidiaries. Also, we assess the recognition of U.S. foreign income tax credits associated with foreign withholding and income tax payments and whether it is more-likely-than-not that our foreign income tax credits will not be realized. If it is determined that any foreign income tax credits need to be recognized or it is more-likely-than-not our foreign income tax credits will not be realized, an adjustment to our provision for income taxes will be recognized at that time.
At July 31, 2016, we had accumulated earnings and profits from our foreign subsidiaries totaling $134.7 million. At the same date, the deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $431,000, which included U.S. income and foreign withholding taxes totaling $39.8 million, offset by U.S. foreign income tax credits of $39.4 million.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At August 2, 2015, we had accumulated earnings and profits from our foreign subsidiaries totaling $88.6 million. At the same date, the deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $2.0 million, which included U.S. income and foreign withholding taxes totaling $33.8 million, offset by U.S. foreign income tax credits of $31.8 million.
At May 1, 2016, we had accumulated earnings and profits from our foreign subsidiaries totaling $129.6 million. At the same date, the deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $604,000, which included U.S. income and foreign withholding taxes totaling $38.5 million, offset by U.S. foreign income tax credits of $37.9 million.
Overall
At July 31, 2016, our non-current deferred tax asset of $1.9 million represents $1.4 million and $561,000 from our operations located in the U.S. and China, respectively. At August 2, 2015, our non-current deferred tax asset of $4.4 million represents $3.5 million and $914,000 from our operations located in the U.S. and China, respectively. At May 1, 2016, our non-current deferred tax asset of $2.3 million represents $1.7 million and $572,000 from our operations located in the U.S. and China, respectively.
Our non-current deferred tax liability balances of $1.5 million, $1.1 million, and $1.5 million at July 31, 2016, August 2, 2015, and May 1, 2016, respectively, pertain to our operations located in Canada.(1) | Current assets represent accounts receivable and inventory for the respective segment. |
Uncertainty In Income Taxes(2) | The $47.8 million at January 29, 2017, represents property, plant, and equipment of $32.6 million and $15.2 million located in the U.S. and Canada, respectively. The $35.6 million at January 31, 2016, represents property, plant, and equipment of $23.0 million and $12.6 million located in the U.S. and Canada, respectively. The $37.5 million at May 1, 2016, represents property, plant, and equipment of $24.8 million and $12.7 million located in the U.S. and Canada, respectively. |
At July 31, 2016, we had a $15.0 million total gross unrecognized tax benefit, of which $3.8 million represents the amount of gross unrecognized tax benefits that, if recognized, would favorably affect the income tax rate in future periods. At August 2, 2015, we had a $14.2 million total gross unrecognized tax benefit, of which $3.6 million represents the amount of gross unrecognized tax benefits that, if recognized, would favorably affect the income tax rate in future periods. At May 1, 2016, we had a $14.9 million total gross unrecognized tax benefit, of which $3.8 million represents the amount of gross unrecognized tax benefits that, if recognized, would favorably affect the income tax rate in future periods.(3) | The $1.8 million at January 29, 2017, represents property, plant, and equipment of $1.1 million and $711 located in the U.S. and China, respectively. The $1.6 million at January 31, 2016, represents property, plant, and equipment of $860 and $730 located in the U.S. and China, respectively. The $1.6 million at May 1, 2016, represents property, plant, and equipment of $893 and $671 located in the U.S. and China, respectively. |
At July 31, 2016, we had a $15.0 million total gross unrecognized tax benefit, of which $11.2 million and $3.8 million were classified as non-current deferred income taxes and income taxes payable – long-term, respectively, in the accompanying consolidated balance sheets. At August 2, 2015, we had a $14.2 million total gross unrecognized tax benefit, of which $10.6 million and $3.6 million were classified as non-current deferred income taxes and income taxes payable – long-term, respectively, in the accompanying consolidated balance sheets. At May 1, 2016, we had $14.9 million of total gross unrecognized tax benefit, of which $11.1 million and $3.8 million were classified as non-current deferred income taxes and income taxes payable – long-term, respectively, in the accompanying consolidated balance sheets.(4) | The $752, $930, and $929 at January 29, 2017, January 31, 2016 and May 1, 2016, respectively, represent property, plant, and equipment associated with unallocated corporate departments and corporate departments shared by both the mattress and upholstery fabric segments. Property, plant, and equipment associated with corporate are located in the U.S. |
We estimate that the amount of gross unrecognized tax benefits will increase by approximately $868,000 for fiscal 2017. This increase primarily relates to double taxation under applicable tax treaties with foreign tax jurisdictions.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14. Statutory Reserves
Our subsidiaries located in China are required to transfer 10% of their net income, as determined in accordance with the People’s Republic of China (PRC) accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the company’s registered capital.
The transfer to this reserve must be made before distributions of any dividend to shareholders. As of July 31, 2016, the company’s statutory surplus reserve was $4.8 million, representing 10% of accumulated earnings and profits determined in accordance with PRC accounting rules and regulations. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.
Our subsidiaries located in China can transfer funds to the parent company with the exception of the statutory surplus reserve of $4.8 million to assist with debt repayment, capital expenditures, and other expenses of the company’s business.
15. Commitments and Contingencies
Litigation
The company is involved in legal proceedings and claims which have arisen in the ordinary course of business. Management has determined that it is not reasonably possible that these actions, when ultimately concluded and settled, will have a material adverse effect upon the financial position, results of operations, or cash flows of the company.
Purchase Commitments
Overall
At July 31, 2016, August 2, 2015, and May 1, 2016, we had open purchase commitments to acquire a building and equipment for our mattress fabrics segment totaling $10.5 million, $2.6 million, and $10.6 million, respectively. The $10.5 million and $10.6 million open purchase commitments as of July 31, 2016 and May 1, 2016, include $7.4 million and $9.3 million associated with the construction of a new building noted below.
Construction of New Building
Effective May 16, 2016, we entered into an agreement with a contractor to construct a new building located in North Carolina that will expand our distribution capabilities and office space at a current estimated cost of $11.2 million. This agreement required an installment payment of $1.9 million in April 2016 and requires additional installment payments to be made in the following fiscal years: Fiscal 2017- $4.3 million; Fiscal 2018- $3.8 million; and Fiscal 2019- $1.2 million. Interest will be charged on the required outstanding installment payments in excess of services that have been rendered at a rate of $2.25% plus the current 30 day LIBOR rate.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Also, we were required to issue a letter of a credit totaling $5.0 million with the contractor's bank being the beneficiary. In addition to the interest that will be charged on the outstanding installment payments noted above, there will be a 0.1% unused fee calculated on the balance of the $5.0 million letter of credit less the amount outstanding per month (see Note 8 for further details).
As of July 31, 2016, we have made payments totaling $3.8 million for services rendered on the construction of this building. The remaining $7.4 million on this commitment is required to be paid on an installment basis over the next three fiscal years as follows: Fiscal 2017 - $2.4 million; Fiscal 2018 - $3.8 million; and Fiscal 2019 - $1.2 million.
The construction of this new building is currently expected to be completed in December 2016.
16. Common Stock Repurchase Program
On June 15, 2016, we announced that our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock. Under the common stock repurchase program, shares may be purchased from time to time in open market transactions, block trades, through plans established under the Securities Exchange Act Rule 10b5-1, or otherwise. The amount of shares purchased and the timing of such purchases will be based on working capital requirements, market and general business conditions, and other factors including alternative investment opportunities.
During the three months ended July 31, 2016, and August 2, 2015, we did not purchase any shares of our common stock.
At July 31, 2016, we had $5.0 million available for additional repurchases of our common stock.
17. Dividend Program
On June 15, 2016, we announced that our board of directors approved the payment of a special cash dividend of $0.21 per share and a regular quarterly cash dividend payment of $0.07 per share. These dividends were paid on July 15, 2016, to shareholders of record as of July 1, 2016. During the first quarter of fiscal 2017, dividend payments totaled $3.4 million, of which $2.5 million represented the special cash dividend payment of $0.21 per share, and $861,000 represented the quarterly dividend payment of $0.07 per share.
During the first quarter of fiscal 2016, dividend payments totaled $5.7 million, of which $5.0 million represented a special cash dividend of $0.40 per share, and $740,000 represented a quarterly dividend payment of $0.06 per share.
On August 30, 2016, we announced that our board of directors approved the payment of a quarterly cash dividend of $0.07 per share. This payment will be made on October 17, 2016, to shareholders of record as of October 3, 2016.
Future dividend payments are subject to board approval and may be adjusted at the board’s discretion as business needs or market conditions change.
I -24(5) | Capital expenditure amounts are stated on the accrual basis. See Consolidated Statements of Cash Flows for capital expenditure amounts on a cash basis. |
13. Income Taxes
Effective Income Tax Rate
We recorded income tax expense of $6.6 million, or 28.9% of income before income taxes, for the nine month period ended January 29, 2017, compared to income tax expense of $7.4 million, or 35.7% of income before income taxes, for the nine month period ended January 31, 2016. Our effective income tax rates for the nine month periods ended January 29, 2017, and January 31, 2016, were based upon the estimated effective income tax rate applicable for the full year after giving effect to any significant items related specifically to interim periods. The effective income tax rate can be affected over the fiscal year by the mix and timing of actual earnings from our U.S. operations and foreign sources versus annual projections and changes in foreign currency exchange rates in relation to the U.S. dollar.
The following schedule summarizes the factors that are attributable to the difference between income tax expense at the federal income tax rate and the effective income tax rate reflected in the consolidated financial statements:
| | 2017 | | | 2016 | |
Federal income tax rate | | | 34.0 | % | | | 34.0 | % |
Tax effects of Chinese foreign exchange gains | | | 1.9 | | | | 3.5 | |
Reversal of foreign uncertain tax position | | | (9.1 | ) | | | - | |
U.S state income tax expense | | | 0.6 | | | | 0.7 | |
Other | | | 1.5 | | | | (2.5 | ) |
| | | 28.9 | % | | | 35.7 | % |
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Deferred Income Taxes
Valuation Allowance
In accordance with ASC Topic 740, we evaluate our deferred income taxes to determine if a valuation allowance is required. ASC Topic 740 requires that companies assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more-likely-than-not” standard, with significant weight being given to evidence that can be objectively verified. Since the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-by-jurisdiction basis, taking into account the effects of local tax law. Based on our assessment at January 29, 2017, we recorded a partial valuation allowance of $557,000, of which $473,000 pertained to certain U.S. state net operating loss carryforwards and credits and $84,000 pertained to loss carryfowards associated with our Culp Europe operation located in Poland. Based on our assessment at January 31, 2016, we recorded a partial valuation allowance of $874,000, of which $498,000 pertained to certain U.S. state net operating loss carryforwards and credits and $376,000 pertained to loss carryfowards associated with our Culp Europe operation located in Poland. Based on our assessment at May 1, 2016, we recorded a partial valuation allowance of $590,000, of which $518,000 pertained to certain U.S. state net operating loss carryforwards and credits and $72,000 pertained to loss carryfowards associated with our Culp Europe operation located in Poland.
No valuation allowance was recorded against our net deferred tax assets associated with our operations located in China and Canada at January 29, 2017, January 31, 2016, and May 1, 2016, respectively.
The recorded valuation allowance of $557,000 at January 29, 2017, has no effect on our operations, loan covenant compliance, or the possible realization of certain U.S. state net operating loss carryforwards and credits and our loss carryforwards associated with our Culp Europe operation located in Poland. If it is determined that it is more-likely-than-not that we will realize any of these deferred tax assets, an income tax benefit will be recognized at that time.
Undistributed Earnings
In accordance with ASC Topic 740, we assess whether the undistributed earnings from our foreign subsidiaries will be reinvested indefinitely or eventually distributed to our U.S. parent company. ASC Topic 740 requires that a deferred tax liability should be recorded for undistributed earnings from foreign subsidiaries that will not be reinvested indefinitely. Based on our assessment as of January 29, 2017, it is our intention not to permanently invest our undistributed earnings from our foreign subsidiaries. Also, we assess the recognition of U.S. foreign income tax credits associated with foreign withholding and income tax payments and whether it is more-likely-than-not that our foreign income tax credits will not be realized. If it is determined that any foreign income tax credits need to be recognized or it is more-likely-than-not our foreign income tax credits will not be realized, an adjustment to our provision for income taxes will be recognized at that time.
At January 29, 2017, we had accumulated earnings and profits from our foreign subsidiaries totaling $143.2 million. At the same date, the deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $405,000, which included U.S. income and foreign withholding taxes totaling $42.5 million, offset by U.S. foreign income tax credits of $42.1 million.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At January 31, 2016, we had accumulated earnings and profits from our foreign subsidiaries totaling $100.9 million. At the same date, the deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $3.3 million, which included U.S. income and foreign withholding taxes totaling $37.3 million, offset by U.S. foreign income tax credits of $34.0 million.
At May 1, 2016, we had accumulated earnings and profits from our foreign subsidiaries totaling $129.6 million. At the same date, the deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $604,000, which included U.S. income and foreign withholding taxes totaling $38.5 million, offset by U.S. foreign income tax credits of $37.9 million.
Overall
At January 29, 2017, our non-current deferred tax asset of $422,000 pertains to our operations located in China. At January 31, 2016, our non-current deferred tax asset of $4.3 million represents $3.5 million and $773,000 from our operations located in the U.S. and China, respectively. At May 1, 2016, our non-current deferred tax asset of $2.3 million represents $1.7 million and $572,000 from our operations located in the U.S. and China, respectively.
At January 29, 2017, our non-current deferred tax liability of $2.9 million represents $1.7 million and $1.2 million from our operations located in Canada and the U.S., respectively. Our non-current deferred tax liability balances of $1.2 million and $1.5 million at January 31, 2016 and May 1, 2016, respectively, pertain to our operations located in Canada.
Uncertainty In Income Taxes
At January 29, 2017, we had a $13.4 million total gross unrecognized income tax benefit, of which $11.6 million and $1.8 million were classified as non-current deferred income taxes and income taxes payable – long-term, respectively, in the accompanying consolidated balance sheets. At January 31, 2016, we had a $13.2 million total gross unrecognized income tax benefit, of which $9.7 million and $3.5 million were classified as non-current deferred income taxes and income taxes payable – long-term, respectively, in the accompanying consolidated balance sheets. At May 1, 2016, we had $14.9 million of total gross unrecognized income tax benefit, of which $11.1 million and $3.8 million were classified as non-current deferred income taxes and income taxes payable – long-term, respectively, in the accompanying consolidated balance sheets.
At January 29, 2017, our $13.4 million total gross unrecognized income tax benefit included $1.8 million that, if recognized, would favorably affect the income tax rate in future periods. At January 31, 2016, our $13.2 million total gross unrecognized income tax benefit, included $3.5 million that, if recognized, would favorably affect the income tax rate in future periods. At May 1, 2016, our $14.9 million total gross unrecognized income tax benefit included $3.8 million that, if recognized, would favorably affect the income tax rate in future periods.
Our gross unrecognized income tax benefit of $13.4 million at January 29, 2017, relates to tax positions for which significant change is reasonably possible within the next year. This amount primarily relates to double taxation under applicable income tax treaties with foreign tax jurisdictions. United States federal and state income tax returns filed by us remain subject to examination for income tax years 2005 and subsequent due to loss carryforwards. Canadian federal returns filed by us remain subject to examination for income tax years 2010 and subsequent. Canadian provincial (Quebec) returns filed by us remain subject to examination for income tax years 2009 and subsequent, with the statute of limitations for the 2009 income tax year expiring in April 2017. Income tax returns associated with our operations located in China are subject to examination for income tax year 2011 and subsequent.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Currently, the Internal Revenue Service is examining our U.S. Federal income tax returns for fiscal 2014, and no adjustments have been proposed at this time. We currently expect this examination to be completed during fiscal 2018. During the third quarter of fiscal 2017, Revenue Quebec commenced an examination of our Canadian provincial (Quebec) income tax returns for fiscal years 2013 through 2015, and no adjustments have been proposed at this time. We currently expect this examination to be completed during fiscal 2018.
In accordance with ASC Topic 740, an unrecognized income tax benefit for an uncertain income tax position can be recognized in the first interim period if the more-likely-than-not recognition threshold is met by the reporting period, or is effectively settled through examination, negotiation, or litigation, or the statue of limitations for the relevant taxing authority to examine and challenge the tax position has expired. If it is determined that any of the above conditions occur regarding our uncertain income tax positions, an adjustment to our unrecognized income tax benefit will be recorded at that time.
During the third quarter of fiscal 2017, we recognized an income tax benefit of $2.1 million for the reversal of an uncertain income tax position associated with a foreign jurisdiction in which the statute of limitations expired. This income tax benefit was treated as a discrete event in which the full income tax effects of the adjustment were recorded in the three and nine month periods ending January 29, 2017.
14. Statutory Reserves
Our subsidiaries located in China are required to transfer 10% of their net income, as determined in accordance with the People’s Republic of China (PRC) accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the company’s registered capital.
The transfer to this reserve must be made before distributions of any dividend to shareholders. As of January 29, 2017, the company’s statutory surplus reserve was $4.5 million, representing 10% of accumulated earnings and profits determined in accordance with PRC accounting rules and regulations. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.
Our subsidiaries located in China can transfer funds to the parent company with the exception of the statutory surplus reserve of $4.5 million to assist with debt repayment, capital expenditures, and other expenses of the company’s business.
15. Commitments and Contingencies
Litigation
The company is involved in legal proceedings and claims which have arisen in the ordinary course of business. Management has determined that it is not reasonably possible that these actions, when ultimately concluded and settled, will have a material adverse effect upon the financial position, results of operations, or cash flows of the company.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Purchase Commitments
Overall
At January 29, 2017, January 31, 2016, and May 1, 2016, we had open purchase commitments to acquire a building and equipment for our mattress fabrics segment totaling $8.2 million, $977,000, and $10.6 million, respectively. The $8.2 million and $10.6 million open purchase commitments as of January 29, 2017 and May 1, 2016, include $4.9 million (of which $4.5 million represents completed work) and $9.3 million associated with the construction of a new building noted below.
Construction of New Building
Effective May 16, 2016, we entered into an agreement with a contractor to construct a new building located in North Carolina that will expand our distribution capabilities and office space at an current estimated cost of $11.1 million. This agreement required an installment payment of $1.9 million in April 2016 and requires additional installment payments to be made in the following fiscal years: Fiscal 2017- $4.3 million; Fiscal 2018- $3.8 million; and Fiscal 2019 - $1.1 million. Interest will be charged on the required outstanding installment payments in excess of services that have been rendered at a rate of $2.25% plus the current 30 day LIBOR rate.
Also, we were required to issue a letter of a credit totaling $5.0 million with the contractor’s bank being the beneficiary. In addition to the interest that will be charged on the outstanding installment payments noted above, there will be a 0.1% unused fee calculated on the balance of the $5.0 million letter of credit less the amount outstanding per month (see Note 8 for further details).
The remaining $4.9 million on this commitment is required to be paid on an installment basis over the next two fiscal years as follows: Fiscal 2018 - $3.8 million; and Fiscal 2019 - $1.1 million.
This new building is currently expected to be completed and placed in service in our fourth quarter of fiscal 2017.
16. Investment in Unconsolidated Joint Venture
Effective January 1, 2017, Culp International Holdings, Ltd. (Culp), a wholly-owned subsidiary of Culp, Inc., entered into a joint venture agreement, pursuant to which Culp owns fifty percent of CLASS International Holdings, Ltd (CLIH). CLIH will produce cut and sewn mattress covers, and its operations will be located in a modern industrial park on the northeast border of Haiti, which borders the Dominican Republic. CLIH is currently expected to commence production in the second quarter of fiscal 2018 and will complement our existing mattress fabric operations with a mirrored platform that will enhance our ability to meet customer demand while adding a lower cost operation to our platform.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Culp’s investment in CLIH will be accounted for under the equity method of accounting in accordance with ASC Topic 823 – Investments – Equity Method and Joint Ventures. The equity method of accounting is required for an investee entity (i.e. CLIH) that is not consolidated but over which the reporting entity (i.e. Culp Inc.) exercises significant influence. Whether or not a reporting entity exercises significant influence with respect to an investee depends on an evaluation of several factors, including representation on the investee’s board of directors, voting rights, and ownership level. Under the equity method of accounting, CLIH’s accounts are not reflected within our Consolidated Balance Sheets and Statements of Net Income. Our share of earnings and losses from CLIH will be reflected in the caption “Equity in net income (loss) of unconsolidated joint venture” in the Consolidated Statements of Net Income. Our carrying value in CLIH is reflected in the caption “Investment in unconsolidated joint venture” in our Consolidated Balance Sheets.
If our carrying value in CLIH is reduced to zero, no further losses will be recorded in our consolidated financial statements. However, if CLIH subsequently reports income, we will not record our share of such income until it equals the amount of its share of losses previously recognized.
17. Common Stock Repurchase Program
On June 15, 2016, we announced that our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock. Under the common stock repurchase program, shares may be purchased from time to time in open market transactions, block trades, through plans established under the Securities Exchange Act Rule 10b5-1, or otherwise. The amount of shares purchased and the timing of such purchases will be based on working capital requirements, market and general business conditions, and other factors including alternative investment opportunities.
During the nine months ended January 29, 2017, and January 31, 2016, we did not purchase any shares of our common stock.
At January 29, 2017, we had $5.0 million available for additional repurchases of our common stock.
18. Dividend Program
On February 28, 2017, we announced that our board of directors approved a quarterly cash dividend of $0.08 per share. This payment will be made on or about April 17, 2017, to shareholders of record as of April 3, 2017.
During the nine months ended January 29, 2017, dividend payments totaled $5.3 million, of which $2.6 million represented a special cash dividend payment of $0.21 per share, and $2.7 million represented quarterly dividend payments ranging from $0.07 to $0.08 per share.
During the nine months ended January 31, 2016, dividend payments totaled $7.3 million, of which $5.0 million represented a special cash dividend of $0.40 per share, and $2.3 million represented quarterly dividend payments ranging from $0.06 to $0.07 per share.
Future dividend payments are subject to board approval and may be adjusted at the board’s discretion as business needs or market conditions change.